Assume that Andrew plc (a European company), considers issuing a US-denominated bond at its present coupon rate of 6 percent, even though it has no incoming cash flows to cover the bond payments.

It is attracted to the low financing rate because Euro-denominated bonds issued in Europe would have a coupon rate of 11 percent. Assume that either type of bond would have a 3-year maturity and could be issued at par value. The company needs to borrow $11 million. Therefore, it will issue either Euro denominated bonds with a par value of 11 million Euros or bonds denominated in US dollars with a par value of US$20 million. The spot rate of the US dollar is $.50 per Euro. Andrew plc has forecasted the US dollars value at the end of each of the next 3 years, when coupon payments are to be paid.

a. Determine the expected annual cost of financing with US dollars. Should Andrew plc issue bonds denominated in Euro or US dollars? Explain.

b. Andrew plc has decided to expand to the Philippines. The interest rate in that country is high. Advise Andrew plc on ways to finance its operations in the Philippines in the short term and long term without being affected by the costly financing. What are the disadvantages of your strategy?

End of Year 1 Exchange rate of US dollar (Euro per USD) 0.51 0.55 0.56 2 3 End of Year 1 Exchange rate of US dollar (Euro per USD) 0.51 0.55 0.56 2 3