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Cost of Financing. Assume that Seminole, Inc., considers issuing a Singapore dollar-denominated bond at its present coupon rate of 7 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 12 percent. 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 either issue U. S. dollar 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 $.50. 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 of Singapore Dollar
1 $.52
2 .56
3 .58
4 .53
Determine the expected annual cost of financing with Singapore dollars. Should Seminole, Inc., issue bonds denominated in U.S. dollars or Singapore dollars? Explain.
What does the firm’s capital structure represent?
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