1) Sambuka, Inc. can issue bonds in either U.S. dollars or in Pounds. Dollar-denominated bonds would have a coupon rate of 7 percent; Pound-denominated bonds would have a coupon rate of 6 percent. Assume that Sambuka can issue bonds worth $10,000,000 in US dollars or 8 million Pounds, given that the current exchange rate is $1.25/1 Pound.
a) If the forecasted exchange rate for the Pound is $1.30 for each of the next three years what is the annual cost of financing for the pound-denominated bonds? Which type of bond should Sambuka issue?
b) If the forecasted exchange rate for the Pound is $1.20 for each of the next three years what is the annual cost of financing for the pound-denominated bonds? Which type of bond should Sambuka issue?