Moulinex, a French multinational manufacturer of kitchen appliances, is considering financing a plant expansion in Germany with Euro-Deutsche marks

(DM). The bond issue would be a five-year maturity instrument with a coupon rate of 7 % to be paid semiannually, whereas the principal repayment occurs at maturity. A comparable financing in French francs (FF) would cost the borrower a coupon rate of 10 % .

(a) Assuming that the FF depreciates at a rate of 1 % (.5% semiannually), that the effective tax rate of Moulinex-France is 50%, and that exchange losses on principal repayments are tax-deductible, which long-term financing option should be selected? On the date of the issue, DMI = FF3.

(b) Would your answer change if exchange losses on principal repayment were not tax-deductible?

(c) A similar fmancing arrangement with bonds denominated in ECUs at a coupon rate of 8.5% annually is possible. Should Moulinex consider such a financing option? Are there other considerations that could influence your recommendation?