To finance a project in Mexico, Shocker, Inc. can issue 3-year bonds in either U.S. dollars or in Mexican pesos to finance a project that would require $100,000,000 in either currency. Dollar-denominated bonds would have a coupon rate of 12 percent (paid annually) and will sell at the par value. Peso-denominated bonds would have a coupon rate of 10 percent (paid annually) to sell at par value. The current spot rate for pesos is $.05, and the peso is expected to appreciate to $.051 in one year, $.052 in two years, and $.053 in three years. If Shocker, Inc. wants to minimize its financing costs, should it finance in U.S. dollars or Mexican pesos? Back up your recommendation with calculations showing why the financing costs will be less in the currency you chose.

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