ert Page Layout Formulas Data Review View fx 1) Assume that Seminole, Inc., cons

Question

ert Page Layout Formulas Data Review View fx 1) 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 financing rate, since U. S. dollar-denominated bonds issued in the United States would have a coupon rate of 12 percent. Assume that either type of bond would have a four year maturity and could be issued at par value. Seminole needs to borrow 510 million. Therefore, it will either issue 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 Singapore dollar is $.50. Seminole has forecasted the Singapore dollar's value at the end of each of the next four years, when coupon payments are to be paid: Exchange rate of arned Points End of yeatr 0.52 $0.56 $0.58 0.53 Determine the expected annual cost of financing with Singapore dollars. Should Seminole, Inc., issue bonds denominated in U.S, dolla Explain (use the large greeen box below). Year 0 Year 1 Year 2 Year 3 Year 4 Bond cash flows Exchange rate S payment Cost of capital (this is the IRR of the USD cash flows) 2] Financing and Exchange Rate Risk:. Compton Co, has a subsidiary in Thailand that produces computer components. The subsidiary sells the components to manufacturers in the U.S. The components are invoiced in U.S. dollars. Compton pays employees of the subsidiary in Thai baht and makes a large monthly lease payment in Thai baht. Compton financed the investment in the Thai subsidiary by borrowing dollars from a U.S. bank. Compton has no other international business a. Given the conditions, is Compton affected favorably or unfavarably, or not affected by depreciation of the Thai baht? Briefly explain. b. Assume that interest rates in Thailand declined recently, so Compton subsidiary cansiders obtaining a new loan in Thai baht. Compton would use the proceeds to pay off its existing loan from a u.s, bank Will this form of financing increase. reduce, or have no impact on its econamic exposure to exchange rate moverments? Briefly explain.

Explanation / Answer

Soln : 1) Please refer the table here to calculate the IRR of US payment when issuing the singapore $ bond with 7% coupon at par value of $20 million and for 4 years.:

Now using the IRR function in excel with $ payment cash flows , we will get cost of Capital = 8.97%

As we can see that it is less than the US bonds copon payment, make it that company is right for using singapore $ bonds.

2) Company affected by Thai Bhat depreciation , as there cost involves in Thai bhat. but source of funds are in $, which will make the exchange rate to act substantially, on depreciation of Thai Bhat , the profit of the company will increase as revenues are also in $.

2-b) On decreasing the rate in Thai, it will trigger the pooling out from foreign investor, make Thai bhat depreciation and when loan will be taken in Thai Bhat to pay off US $ loan , it will increase the economic exposure, as More Thai bhat is required to pay off the same $ loan.

Year 0 1 2                       3                         4 Bond Cash flows(c) -20 1.4 1.4 1.4 21.4 Exchange rate (E) 0.5 0.52 0.56 0.58 0.53 $ payment(c*E) -10 0.728 0.784 0.812 11.342

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