Sambuka, Inc. can issue annual coupon bonds in either U.S. dollars or in Euros that mature in three years. Dollar-denominated bonds would have a coupon rate of 5 percent; Euro-denominated bonds would have a coupon rate of 4 percent. Assuming that Sambuka can issue bonds worth $10,000,000 in US dollars or 8 million Euros, given that the current exchange rate is $1.25/1 Euro.

A) If the forecasted exchange rate for the Euro is $1.28/1 Euro for each of the next three years what is the annual cost of financing for the Euro-denominated bonds? Which type of bond should Sambuka issue?

B) If the forecasted exchange rate for the Euro is $1.21 for each of the next three years what is the annual cost of financing for the Euro-denominated bonds? Which type of bond should Sambuka issue?