11 cost of financing assume that seminole inc considers issuing a singapore dollar d 1319233

11.   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 flows to cover the bond payments. It is attracted to the low financ- 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.

 

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