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FIN - INTERNATIONAL FINANCIAL MANAGEMENT

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Question;INTERNATIONAL FINANCIAL MANAGEMENT6) Suppose Dell wants to borrow $500 million or the foreign currency equivalent for 4years. It has decided to use international bond markets rather than the U.S. market as asource 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 theissue 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% offace value with a coupon rate of 3.5%. Expenses associated with the issuewould be 2.5% of the amount borrowed.(iii)Borrow using a dual currency Swiss franc Foreign Bond. The bond isissued 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 registrationrequirements as an ordinary SF bond issued in Switzerland. The SF bondcan be written with a face value of SF 600m., and could be issued at parwith a coupon of 6.2%. Expenses associated with the issue would be 2.2%of the amount borrowed. At maturity, the bonds face value paymentwould be would be $470 million.Assume that Dell would hedge the exchange risk of its internationalpayments using the forward market. The bank is quoting Dell thefollowing rates:$/eurosSpot1-yr Forward2-yr Forward3-yr Forward4-yr ForwardBid$1.2500/euro$1.2610/euro$1.2790/euro$1.2840/euro$1.3020/euroOffer$1.2505/euro$1.2618/euro$1.2805/euro$1.2855/euro$1.3038/euroBidSF 1.1950/$SF 1.2115/$SF 1.2280/$SF 1.2420/$SF 1.2595/$OfferSF 1.2000/$SF 1.2125/$SF 1.2295/$SF 1.2435/$SF 1.2610/$SF/$Spot1-yr Forward2-yr Forward3-yr Forward4-yr Forwarda) Given the three financing alternatives described above, and Dells desire to hedge itsexchange risk in the forward market, which alternative offers the lowest financingrate for Dell (compute all-in-costs)?1b)Suppose the face value payoff of the dual currency bond is $480 million and Dellcontinues 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 euroEurobond using a 4-year currency swap in which Dell would pay dollars and receiveeuros (fixed rates). A swap bank provides the following quotes to Dellbidofferdollars5.96.0euros4.34.4What would be the all-in cost of the Euro eurobond in this case? [Hint: you will needto compute the notional principal for this problem)d) Other than rate of return differences, are there other factors that Dell may want to takeinto account when choosing between the Eurobond issues and the SF dual currencybond?

 

Paper#48295 | Written in 18-Jul-2015

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