Having previously identified the location of its Greenfield investment, Acme

Having previously identified the location of its Greenfield
investment, Acme, a multi-billion public MNE that is incorporated in
the U.S., must next obtain external financing for its proposed
overseas production facility. It has been estimated that the
acquisition will cost $500M and all funds will be secured in the U.S.
Your job is to explain to this committee some of the financial aspects
of this acquisition.

Deliverable: At the next steering committee meeting, you will provide
a detailed presentation of the characteristics of the various external
financing alternatives, including the advantages and disadvantages of
each. Your report should conclude with a recommendation of which
alternative (or combination of alternatives) should be used to finance
the overseas investment.

A company like Acme that needs to expand its operations has several external

financing options. This can be either through debt or equity. There are various options

including leasing, shares, bonds, debentures, grants, hire purchase, debt factoring and

venture capital, among others. Capital structure refers to the way through which

companies are able to finance their assets through hybrid securities, debt or equity.

Financing of foreign company branches is influenced by local tax rates and the

conditions of the capital market. Therefore, financing an overseas project depends on

effective tax rates. Several factors such as weighted average cost of capital (WACC)

and agency costs should be considered in choosing an external funding source. The

weighted average cost of capital is the minimum rate that a company is supposed to

earn from the existing asset base in order to satisfy the owners, creditors and other

capital providers. Agency costs restrict the leverage of a firm. Taking financial risks

leads to higher leverage. This also increases the agency cost of debt and leads to lower

debt capacity. Leverage helps to reduce the loss in terms of firm value. Therefore, debt

becomes advantageous especially in firms that have few opportunities of growth or high

percentage of assets in place (Trigeorgis, 1995). This report explores the advantages

and disadvantages of some of the major external financing options that Acme can

employ.

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