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Martha, Inc., a U.S. company is considering issuing a Singapore dollar denominated bond at its present coupon rate of 6 percent, even though it has no incoming cash flows to cover the bond payments. It is attracted to the low financing rate, since U. S. dollar-denominated bonds issued in the United States would have a coupon rate of 10 percent. Assume that either type of bond would have a 4-year maturity and could be issued at par value. Marta needs to borrow $12 million. Therefore, it will either issue U. S. dollar denominated bonds with a par value of $12 million or bonds denominated in Singapore dollars with a par value of S$16 million. The spot rate of the Singapore dollar is $.75. Martha has forecasted the Singapore dollar's value at the end of each of the next four years, when coupon payments are to be paid:
Year 1 $0.76
Year 2 $0.77
Year 3 $0.79
Year 4 %0.78
(1) Calculate the expected annual cost (as a percentage) of financing with Singapore dollars.
(2) Should Martha, Inc., issue bonds denominated in U.S. dollars or Singapore dollars? Why?
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