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GBA Company wishes to raise $6,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GBA Company is

GBA Company wishes to raise $6,000,000 with debt financing. The funds will be repaid with interest in 1 year. The treasurer of GBA Company is considering three sources:

1) Borrow USD from Citibank at 3.00%

2) Borrow EUR from Deutsche Bank at 5.50%

3) Borrow GBP from Barclays at 4.50%

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 GBA Company has no operations in Europe. A representative of GBA contacts a local academic to provide projections of the spot rates 1 year in the future. The academic comes up with the following table:

Currency

Spot Rate

Projected Rate 1 Year in the Future

USD/GBP

1.45

1.48

USD/EUR

0.97

0.93

  1. What is the expected interest rate cost for the loans in EUR and GBP?
  2. What are the projected USD/GBP rate and USD/EUR rate for which the expected interest costs would be the same for the three loans?

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