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AZ Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of AZ Company is
AZ Company wishes to raise $5,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of AZ Company is considering three sources: i. Borrow USD from Citibank at 1.50% ii. Borrow EUR from Deutsche Bank at 3.00\% iii. Borrow GBP from Barclays at 4.00% If the company borrows in euros or British pounds, it will not cover the foreign exchange risk; that is, it will change foreign currency for dollars at today's spot rate and buy foreign currency back 1 year later at the spot rate prevailing then. The AZ Company has no cash flows outside USD. A representative of AZ contacts you as a student of finance to assist with the following projections: a. What is the expected interest rate cost for the loans in EUR and GBP?(3 marks) b. Should the company borrow in the currency with the lowest interest rate cost? Why or why not? Would your answer change if GBA did generate cash flows in the UK and continental Europe? (2 marks)
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