| Course | BUS 551 Corporate Financial Management |
|---|---|
| Module | Module 8 |
| Paper type | International corporate finance analysis |
| Length | About 1,008 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 551 Module 8
A Plant in Saltillo: Valuing and Financing a Foreign Subsidiary Without Double-Counting Country Risk
Student Name
MBA Program, Aspen University
BUS 551: Corporate Financial Management
Instructor Name
Month Day, Year
A Plant in Saltillo: Valuing and Financing a Foreign Subsidiary Without Double-Counting Country Risk
Great Lakes Steering, a composite supplier based in Grand Rapids, Michigan, makes steering columns and linkages for light trucks. Two of its largest customers have moved truck assembly to plants near Saltillo, in the Mexican state of Coahuila, and are asking suppliers to locate nearby to support just-in-time delivery. Great Lakes is considering a $36 million plant in Saltillo. This paper evaluates the investment and recommends how to finance it.
Cash Flows and Currencies
The plant's sales would be priced in U.S. dollars under the customers' contracts, about $48 million a year at full volume. Most of its costs would be in Mexican pesos: wages for about 420 workers, utilities, local services and some locally sourced materials, totaling the equivalent of about $19 million a year at the current exchange rate. Steel and some components would be imported and paid in dollars. The plant would therefore earn dollars and spend largely pesos, which means a stronger peso would raise its costs in dollar terms.
Discounting Consistently
Shapiro (2013) explains that foreign projects can be evaluated in either of two consistent ways: forecast foreign currency cash flows and discount them at a foreign currency rate, or convert them to the home currency at expected exchange rates and discount at a home currency rate. Mixing the two produces errors. Because Great Lakes' shareholders care about dollars and the revenue is already in dollars, the analysis converts peso costs to dollars at expected exchange rates, which reflect the expected difference between Mexican and U.S. inflation, and discounts all flows at the company's 10% dollar cost of capital for projects of this type.
Treating Country Risk
A common approach is to add a country risk premium, several percentage points, to the discount rate. Lessard (1996) argued against this as a general practice. Adding a premium to the discount rate assumes that country risk grows steadily over time and is the kind of risk investors demand compensation for, and it often double-counts risks that should be reflected in cash flows. He recommended identifying specific risks, estimating their effects on expected cash flows and, where insurance or contracts can transfer them, pricing that protection explicitly. The analysis below follows this approach.
Scenarios
The expected net present value of about $9.2 million is positive, and the plant remains valuable in all but the trade dispute and disruption scenarios. Political risk insurance could transfer part of the disruption risk for an estimated premium of $180,000 a year.
| Scenario | Description | Probability | Net present value |
|---|---|---|---|
| Base | Contracts renewed; peso follows inflation; trade rules unchanged | 60% | $14.8 million |
| Strong peso | Peso stays 15% stronger in real terms for five years | 20% | $6.0 million |
| Trade dispute | Tariffs or stricter origin rules raise costs for two years | 15% | minus $2.0 million |
| Disruption | Prolonged security or political disruption forces temporary closure | 5% | minus $12.0 million |
| Expected value | Not applicable | 100% | about $9.2 million |
Why Not Supply From Michigan
The alternative to a Mexican plant is to keep producing in Michigan and ship components south. That option avoids country risk but carries its own costs: freight of about $1.9 million a year, longer delivery times that customers' just-in-time systems penalize, and the risk that customers shift work to suppliers who are already nearby. The customers have said that suppliers within a day's drive will be preferred when contracts are renewed. Compared with this alternative, the Saltillo plant protects existing business as well as adding new revenue, a benefit the scenario values capture only partly.
Operating Risks on the Ground
Beyond currency and politics, the plant faces practical risks: competition for skilled workers in a region where many suppliers are expanding, rising wages, and the challenge of transferring quality systems from Michigan. Great Lakes plans to send a team of six engineers for the first eighteen months and to partner with a local technical institute for training. These costs, about $1.4 million, are included in the base case.
Repatriation and Taxes
The parent can use only cash it can bring home. Dividends from the Mexican subsidiary are subject to Mexican corporate tax and a withholding tax, partly offset by foreign tax credits in the United States. Transfer prices for components sold between the plant and the parent must follow arm's-length rules in both countries; setting them aggressively to shift profit would invite audits. The analysis assumes dividends are paid annually after the plant is established and taxes are paid at expected effective rates.
Financing the Subsidiary
Desai et al. (2004), using data on U.S. multinationals' foreign affiliates, found that affiliates in countries with weak creditor rights or underdeveloped credit markets borrowed more from their parents and less from local lenders, and that internal borrowing responded to tax incentives. Multinationals use internal capital markets to overcome local financing problems. Mexico has active banks, but peso loans carry higher rates. Great Lakes should fund the plant with $18 million of parent equity, $10 million of parent loans in dollars and an $8 million peso credit line from a Mexican bank for working capital. The peso line matches peso working capital needs with peso funding, so the plant does not have to convert dollars each month to meet local payroll and suppliers, and it keeps the parent's dollar loans limited to the long-lived plant and equipment.
Recommendation
Great Lakes should approve the Saltillo plant, contingent on five-year supply agreements with both customers, and finance it with the mix described. It should purchase political risk insurance for the disruption scenario, hedge part of its expected peso costs for the first two years and review trade rules each year.
Conclusion
The Saltillo plant's value depends on handling currency and country risk carefully. Consistent currency treatment, scenarios in place of an arbitrary premium, attention to repatriation and a financing structure that combines internal and local funding give a clearer picture than a single forecast would. With an expected value of about $9.2 million and specific protections for its main risks, the plant is a sound investment.
References
Desai, M. A., Foley, C. F., & Hines, J. R., Jr. (2004). A multinational perspective on capital structure choice and internal capital markets. Journal of Finance, 59(6), 2451-2487. https://doi.org/10.1111/j.1540-6261.2004.00706.x
Lessard, D. R. (1996). Incorporating country risk in the valuation of offshore projects. Journal of Applied Corporate Finance, 9(3), 52-63. https://doi.org/10.1111/j.1745-6622.1996.tb00298.x
Shapiro, A. C. (2013). Multinational financial management (10th ed.). Wiley.
What the BUS 551 Module 8 instructions ask for
The Aspen catalog for BUS 551 includes international corporate finance, and the final module commonly asks students to evaluate a foreign investment or financing decision. Use your classroom's directions for scope; this example evaluates and finances one foreign plant. Identify which cash flows are in which currency. Convert and discount consistently, either in the foreign currency at a foreign rate or in the home currency at a home rate. Address country risks, such as currency changes, trade rules and political events, preferably through adjustments to expected cash flows or scenarios. Consider how and when cash can be returned to the parent and how it will be taxed. Recommend how the subsidiary should be financed, and explain how the structure manages risk.
How this BUS 551 Module 8 example is built
The paper opens with Great Lakes Steering's customers moving assembly to northern Mexico and requiring nearby suppliers. Cash flows are separated: dollar-priced sales of about $48 million a year and peso costs for labor, utilities and local materials. A section explains discounting in dollars at a dollar rate after converting peso costs at expected exchange rates. Lessard's Journal of Applied Corporate Finance article argues that country risk should be reflected in expected cash flows through explicit scenarios rather than a blanket premium. Three scenarios, a strong peso, a tariff dispute and a disruption, are weighted to give an expected net present value of about $9.2 million. Repatriation, transfer pricing and tax credits are addressed. Desai, Foley and Hines's Journal of Finance study supports funding the subsidiary partly with parent loans, and Shapiro's text supports the overall method.
Reading the BUS 551 Module 8 grading rubric
International finance papers in an MBA course are marked on consistent currency treatment, a defensible approach to country risk, attention to repatriation and taxes, and a financing recommendation that manages risk. This example identifies the currency of each cash flow and applies one consistent method, a step the grader can verify. It follows Lessard's Journal of Applied Corporate Finance article in modeling country risk through weighted scenarios instead of an arbitrary discount rate premium, which instructors recognize as the more rigorous approach. Desai, Foley and Hines's Journal of Finance study grounds the financing structure in evidence on how multinationals use internal capital markets, and Shapiro's Multinational Financial Management supplies the framework. The recommendation ties the financing mix to the currency exposure, showing integrated thinking.
BUS 551 Module 8 help from the desk
The most frequent mistake in international finance papers is mixing currencies, for example discounting peso cash flows at a dollar rate. Choose one currency for discounting and convert consistently. Another is adding a large country risk premium to the discount rate without explaining it, which can double-count risks also reflected in cash flows and penalize long-lived projects too heavily. Model specific risks in cash flows or scenarios instead. Remember that the parent cares about cash it can receive; address repatriation, withholding taxes and transfer pricing. Consider natural hedges, such as matching local costs with local revenue or debt. Use current trade rules and state their source and date. Finally, recommend a financing structure and explain how it reduces the parent's exposure.
Write yours, or have the desk draft it
This paper is an original model document written by our desk, not a submitted student paper and not an official Aspen University document. Read it for the moves, then write your own to the instructions in your classroom. If you want one built to your exact prompt and rubric, the first custom sample is free and arrives in 24 to 48 hours.
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BUS 551 Module 8 questions, answered
What does BUS 551 Module 8 usually ask for?
Aspen's BUS 551 ends with international corporate finance, so evaluating a foreign investment or financing decision with attention to currency, country risk and repatriation is typical. Follow your classroom prompt.
How should foreign cash flows be discounted?
Consistently: either convert them to the home currency at expected exchange rates and use a home-currency discount rate, or discount in the foreign currency at a foreign rate.
Should a country risk premium be added to the discount rate?
Lessard argued it is usually better to reflect country risks in expected cash flows through explicit scenarios, rather than adding an arbitrary premium.
Where can I find a free BUS 551 Module 8 sample paper?
The complete analysis is shown above: a steering component supplier's plant in Saltillo, with currency treatment, weighted country risk scenarios, repatriation and a financing structure.
What is an internal capital market?
The system of loans and equity flows within a multinational group, which Desai, Foley and Hines found firms use to fund affiliates where local borrowing is costly.