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Suppose Dell wants to borrow $500 million or the foreign currency equivalent




INTERNATIONAL FINANCIAL MANAGEMENT;6) Suppose Dell wants to borrow $500 million or the foreign currency equivalent for 4;years. It has decided to use international bond markets rather than the U.S. market as a;source of funding. It is considering the following;(i);Borrow in $ using a Eurodollar bond. The bond could be issued at 100.5%;of face value with a coupon rate of 5%. Expenses associated with the;issue would be 1.8% of the amount borrowed.;(ii);Borrow in euros using a euro-denominated Eurobond. The euroEurobond has a face value of euro 400m., and it can be issued 99.5% of;face value with a coupon rate of 3.5%. Expenses associated with the issue;would be 2.5% of the amount borrowed.;(iii);Borrow using a dual currency Swiss franc Foreign Bond. The bond is;issued in SF, the coupons are paid in SF, but the principal is repaid in US$.;The bond would be issued in Switzerland, subject to the same registration;requirements as an ordinary SF bond issued in Switzerland. The SF bond;can be written with a face value of SF 600m., and could be issued at par;with a coupon of 6.2%. Expenses associated with the issue would be 2.2%;of the amount borrowed. At maturity, the bonds face value payment;would be would be $470 million.;Assume that Dell would hedge the exchange risk of its international;payments using the forward market. The bank is quoting Dell the;following rates;$/euros;Spot;1-yr Forward;2-yr Forward;3-yr Forward;4-yr Forward;Bid;$1.2500/euro;$1.2610/euro;$1.2790/euro;$1.2840/euro;$1.3020/euro;Offer;$1.2505/euro;$1.2618/euro;$1.2805/euro;$1.2855/euro;$1.3038/euro;Bid;SF 1.1950/$;SF 1.2115/$;SF 1.2280/$;SF 1.2420/$;SF 1.2595/$;Offer;SF 1.2000/$;SF 1.2125/$;SF 1.2295/$;SF 1.2435/$;SF 1.2610/$;SF/$;Spot;1-yr Forward;2-yr Forward;3-yr Forward;4-yr Forward;a) Given the three financing alternatives described above, and Dells desire to hedge its;exchange risk in the forward market, which alternative offers the lowest financing;rate for Dell (compute all-in-costs)?;1;b);Suppose the face value payoff of the dual currency bond is $480 million and Dell;continues to hedge its risk in the forward market. Does this change your conclusion?;Explain.;c) Suppose instead of using the forward market, Dell considers hedging the euro;Eurobond using a 4-year currency swap in which Dell would pay dollars and receive;euros (fixed rates). A swap bank provides the following quotes to Dell;bid;offer;dollars;5.9;6.0;euros;4.3;4.4;What would be the all-in cost of the Euro eurobond in this case? [Hint: you will need;to compute the notional principal for this problem);d) Other than rate of return differences, are there other factors that Dell may want to take;into account when choosing between the Eurobond issues and the SF dual currency;bond?


Paper#26911 | Written in 18-Jul-2015

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