Page 10 - PowerPoint Presentation

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.

10