Apple Computer can issue bonds in either U.S. dollars (USD) or in Canadian dolla

Question

Apple Computer can issue bonds in either U.S. dollars (USD) or in Canadian dollars (CAD). US Dollar-denominated bonds would have a coupon rate of 15 percent; Canadian dollar-denominated bonds would have a coupon rate of 12 percent. Assume that Apple can issue bonds worth $10,000,000 (USD) or an equivalent amount in CAD at the current exchange rate. Also assume that the current exchange rate of the Canadian dollar is $.80, and that the forecasted exchange rate of the Canadian dollar in each of the next three years is $.81, $.82 and $.83, what is Apple’s annual US dollar cost of financing for the Canadian dollar-denominated bonds? Which type of bond should Apple issue? (Note: Apple will have to convert USD to CAD every year to make the payments on the Canadian bonds. Draw the timeline in CAD, determine the USD payments for each time period and use the CF registers in your calculator with IRR function to find the effective US dollar yield of the Canadian bonds.) DRAW A TIMELINE

Explanation / Answer

$10,00,000 USD equivalent CAD is $10,00,000/.80

=CAD 12,50,000

cost of annual financing in $ every year

T1 12,50,000*.12*.81=$ 121,500

T2 12,50,000*12*82=$ 123,000

T3 12,50,000*.12*.83 =$ 124,500

TIME LINE
T0 10,00,000

T1 (121,500)

T2 ( 123,000)

T3 (124,500)

T3 ( 10,37,500) priciple payment in $

USING IRR $ yield is 13.382

US yield is 15% so its better to raise in CAD

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