19 financing in a high interest rate country fair 64257 eld corp a u s 64257 rm rece 1319211

19.   Financing in a High-Interest-Rate Country. Fairfield Corp., a U.S. firm, recently established a subsid- iary in a less developed country that consistently experiences an annual inflation rate of 80 percent or more. The country does not have an established stock market, but loans by local banks are available with a 90 percent interest rate. Fairfield has decided to use a strategy in which the subsidiary is financed entirely with funds from the parent. It believes that in this way it can avoid the excessive interest rate

in the host country. What is a key disadvantage of using this strategy that may cause Fairfield to be no better off than if it paid the 90 percent interest rate?