Page 176 - 5.2 i. Manac Finance ITC Summarised Notes

THE FINANCING DECISION

Determining the net present cost / internal rate

of return of foreign debt finance

• When a South African business wishes to incur foreign debt
finance, an evaluation of this financing option will require certain

adjustments to be made, including adjustment for the effects of
changes in exchange rates and foreign exchange risk.

• Author, Luis E Pereiro (2002), detailed adjustment methods that
can be used when evaluating foreign debt finance in a book on
valuation in emerging markets.

• Although this publication is written from a US perspective, the
methods are equally relevant in a SA perspective. More
specialised methods are available, but the description in this

section is based on the simplified method described by Pereiro
and we therefore acknowledge the contribution made by this
author.

• A financial manager of a South African business, determining the
net present cost (NPC) or internal rate of return (IRR) of foreign
debt should preferably make use of the following method.

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