Problems are based on the following set of facts.

Assume Golden Earrings, Inc. is interested in acquiring a firm in Country M as part of its global expansion plan. Assume that Golden Earrings, Inc. was bidding on an acquisition with the price based on a 6.0x multiple of the Targets trailing 12 months EBITDA, which has been confirmed to be 20,000,000 in Country M currency. The current exchange rate is 1.40, meaning $1.40USD will exchange into 1 Country M currency unit. Golden Earrings, Inc. seeks to finance 100% of the acquisition price.

To complete the acquisition, assume that Golden Earrings, Inc. has two financing choices, both of which rely on the new cash flow of the acquisition target as well as the credit strength of Golden Earrings, Inc.:

First, it can finance the acquisition with a two-part facility. The first part will be senior loan provided by its U.S. based bank at an interest rate of 5 percent and based on a maximum loan size equal to a leverage multiple of 3.0x TTM EBITDA of the target. The remainder of the facility will be provided by a U.S. based mezzanine lender at a rate of 11 percent. All payments under this approach will be due and payable to the bank in USD.

As an alternative, Golden Earrings, Inc. has identified a so-called Uni-tranche lender in Country M to provide a single loan in the full amount of the acquisition price based on a leverage multiple of 6x TTM EBITDA, priced at an interest rate of 12 percent. All payments under this approach will be due and payable to the Country M bank in Country M currency.

Golden Earrings, Inc. has conducted extensive analysis of the expected trend in the currency relationship between USD and Country M currency, and a conclusion has been reached that the USD will be expected to strengthen relative to Country M currency over the foreseeable future.

What is the effective or blended interest rate of the two acquisition financing proposals set out above under I and II?

What factors would you consider to be relevant in deciding:

Whether to proceed with the acquisition?

Whether to select financing proposal I or II?