Reference no: EM133119625

Question - Graham Enterprises Limited - Graham Enterprises Limited (Graham) has just renegotiated the purchase of an office building for £20 million in London, United Kingdom, to be used as the head office of its newly incorporated, wholly owned European operating subsidiary, Graham Overseas Limited (GOL). Transfer to ownership of GOL is to be made on January 1, 20X6. Graham has arranged a loan for £20 million to finance the purchase through its bankers. The loan, to be dated January 1, 20X6, is at 12% and is repayable in 20 equal annual instalments commencing January 1, 20X7. The loan would be made to GOL, which would make all interest and principal payments in pounds sterling.

The building will be depreciated on a straight-line basis over 20 years. Assume the following exchange rates: January 1, 20X6: £1 = $2.00 and December 31, 20X6: £1 = $1.50.

Required -

1. Discuss the nature of the relationship between the building and the loan, and evaluate the alternatives available to Graham.

2. Discuss fully the options available to Graham in structuring its relationship to GOL, and evaluate the impact of each alternative on the consolidated financial statements. Show all supporting calculations.