Cost of financing. Assume that Seminole plc considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7%, even though it has no incoming cash flows to cover the bond payments.

It is attracted to the low financing rate, since UK pound-denominated bonds issued in the United Kingdom would have a coupon rate of 12%. Assume that either type of bond would have a four-year maturity and could be issued at par value. Seminole needs to borrow £10 million. Therefore, it will issue either UK pound-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 £0.33. 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:

Determine the expected annual cost of financing with Singapore dollars. Should Seminole plc issue bonds denominated in UK pounds or Singapore dollars?
Explain.

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End of Year 1 Pound Exchange Rate of Singapore 0.34 2 0.35 3 0.38 4 0.33