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What was actual rate of interest paid by MS Manufacturing

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Question - The MS Manufacturing Company, a Canadian company, borrowed $100,000 US from the Bank of America; the loan carried an interest rate of 12% and the exchange rate at the time the funds were advanced was $0.7875 US to $1 Canadian. The principal and interest were repaid exactly one year later, when the exchange rate was $1 US equals $1.3225 Canadian.

Required -

a) What was the actual rate of interest paid by MS Manufacturing Company on the loan?

b) Assume the rate of interest on one year loans from Canadian sources is 15%. If the one year forward rate on the date the U.S. funds were advanced was $0.7725 US to $1 Canadian, what should MS Manufacturing do to minimize their borrowing costs? (Hint: Compare borrowing in the U.S. versus domestically in Canada.)

Reference no: EM133076305

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