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Question - Xplc is a manufacturing company based in the UK. All manufacturing previously took place in the UK but two years ago the company found that it would be much cheaper if its factory was based in another country and, consequently, relocated its operations to the US.
A factory was built costing £5m which was financed by reserves and a 9-year 5% foreign bond denominated in dollars. The amount of funds raised at the time was £4m when the prevailing spot rate was $1.80 per £. Each bond in issue has a par value of $1,000. The rate of interest on dollar denominated bonds with a similar risk profile is 9%. The annual interest payment due on the bond is payable in 6 months' time.
Required -
A) Calculate the market value in dollars of the foreign bond.
B) Discuss, using relevant theory, why the company may have decided to raise the additional funds through the issue of a bond as opposed to an equity issue.
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