Question
A Japanese electronics manufacturer is contemplating investing $1 billion (with all of the investment to be made at the outset) in a 10year investment project
A Japanese electronics manufacturer is contemplating investing $1 billion (with all of the investment to be made at the outset) in a 10year investment project in the U.S. The Japanese company is well known in world capital markets and is universally regarded as quite safe. To help finance the project, the company believes it could issue 10year zero coupon bonds in the U.S. at a yield that would be very close to the current 10year U.S. Treasury rate of 4%. Alternatively, the company could issue equivalent 10year zero coupon debt in Japan at an interest rate of 2%. Assume for simplicity that both rates are annually compounded rates. The current spot exchange rate is 89.6 /$.
a) The companys treasurer argues that the company should issue new debt in Japan, where the interest rate is lower. Do you agree? Briefly explain.
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