Response to the following problem:
Cost of Financing.
Assume that Seminole, Inc., considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7 percent, even though it has no incoming cash ?ows to cover the bond payments. It is attracted to the low ?nanc- ing rate, since U.S. dollar-denominated bonds is- sued in the United States would have a coupon rate of 12 percent. Assume that either type of bond would have a 4-year maturity and could be issued at par value. Seminole needs to borrow $10 mil- lion. Therefore, it will issue either U.S. dollar- denominated bonds with a par value of $10 million or bonds denominated in Singapore dollars with a par value of S$20 million. The spot rate of the Sin- gapore dollar is $.50. Seminole has forecasted the Singapore dollar's value at the end of each of the next 4 years, when coupon payments are to be paid:
|
End of Year
|
Exchange Rate of Singapore Dollar
|
|
1
|
$.52
|
|
2
|
.56
|
|
3
|
.58
|
|
4
|
.53
|
Determine the expected annual cost of financing with Singapore dollars. Should Seminole, Inc., is- sue bonds denominated in U.S. dollars or Singa- pore dollars? Explain.