Reference no: EM132951913

Question - Assume that Seminole, plc considers issuing a Singapore dollar-denominated bond at its present coupon rate of 4%, even though it has no incoming cash flows to cover the bond payments. The company is attracted to the low financing rate, since UK pound-denominated bonds issued in the United Kingdom would have a coupon rate of 8%. Assume that either type of bond would have a four-year maturity and could be issued at par value. Seminole needs to borrow £10 million. Therefore, it will issue either UK pound denominated bonds with a par value of £10 million or bonds denominated in Singapore dollars with a par value of S$20 million. The spot rate of the Singapore dollar is £0.5. Seminole has forecasted the Singapore dollar's value at the end of each of the next four years, when coupon payments are to be paid:

End of Year Exchange Rate SGD/GBP

1 0.52;

2 0.53;

3 0.54;

4 0.55

Required -

a) Determine the expected annual cost of financing with the Singapore dollar-denominated bond (in pounds).

b) Should Seminole, Plc issue bonds denominated in UK pounds or Singapore dollars? Explain your answer.