Essay on Morris

Words: 3141
Pages: 13

Case 19 | Morris de Minas | By Ian H. Giddy |

Vijak Pongtippun Viwan Wongviriyawong Wenyu |

Introduction In August 1984, Morris Mini Mainframe Computer Company in New Jersey was looking for the most desirable financing alternative for Morris de Minas Ltda, its Brazilian affiliate, in the working capital needs of 82,650 million cruzeiros or US $39,320,000; at the exchange rate of 2,102 cruzeiros per US dollar. David Albuquerque, the vice-president of finance for the Latin American Division, was in charge of exploring possible financing arrangements and preparing a financing alternative plan. Albuquerque believed that Brazilian expected inflation rate and tax legislation, and the future exchange rate would play major roles
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The pace of inflation had also increased in every year since 1974 (see Exhibit 3). The causes included strong internal demand, unchecked monetary expansion, severe increases in prices in world markets, and food supply related problems. Furthermore, recent salary increases above the amount permitted by the wage legislation, price adjustments allowed to industry and commerce, and the reduction of subsidies for oil, sugar, and wheat had made the inflation rate wave continue. As a consequence, Brazil would not be able to export due to the high inflation rate and high interest rate in the country. High inflation rate in Brazil led to higher prices of its goods and services which pushed the demand down making export unfavorable. Moreover, the money supply growth rate had increased during 1974 to 1983 (see Exhibit 3). In the short run, an increase in the money supply will lower the interest rate which spurs investment through putting more money in the hands of consumers and thus stimulate spending. This will also made the exchange rate goes up (currency depreciation) in order to create the expectation that it will fall faster in the future. This increase in the exchange rate makes domestic goods more attractive, thus increasing both foreign and domestic demand for domestically produced goods. This then encourages output growth as business firms respond to increased sales by ordering more raw materials and increasing production. However, if the money supply