Collette, Inc., is considering issuing an Canadian dollar denominated bond at its present coupon rate of 10 percent, even though it has no incoming cash flows to cover the bond payments. U. S. dollar-denominated bonds issued in the United States would have a coupon rate of 9 percent. Either type of bond would have a 4-year maturity and could be issued at par value. Collette needs to borrow $10 million. Therefore, it will either issue U. S. dollar denominated bonds with a par value of $10 million or bonds denominated in Canadian dollars with a par value of C$13 million. The spot rate of the Canadian dollar is $.77. Collette has forecasted the Canadian dollars value at the end of each of the next four years, when coupon payments are to be paid at: Year 1 $0.76, Year 2 $0.75, Year 3 $0.74, and Year 4 $0.73.

(1) Calculate the expected annual cost of financing, as a percentage, with Canadian dollars.

(2) Should Collette, Inc., issue bonds denominated in U.S. dollars or Canadian dollars? Explain.