8. Nominal versus effective cost of debt (intermediate). Black & Decker, a U.S. multinational manufacturer of...
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8. Nominal versus effective cost of debt (intermediate). Black & Decker, a U.S. multinational manufacturer of small power tools, is considering financing a plant expansion in France with euro () Eurobonds. The bond issue would be a 5-year maturity instrument with a coupon rate of 7 percent to be paid semiannually, whereas the principal repayment occurs at maturity. A compa- rable financing in U.S. dollars ($) would cost the borrower a coupon rate of 10 percent. a. Assuming the U.S. dollar depreciates at a rate of 1 percent (0.5 percent semiannually), the effective tax rate of Black & Decker U.S. is 35 percent, and the exchange losses on principal repayments are tax-deductible, which long-term financing option should be selected? On the date of the issue, 1 = $1.34. b. Would your answer change if exchange losses on principal repayment were not tax-deductible? 8. Nominal versus effective cost of debt (intermediate). Black & Decker, a U.S. multinational manufacturer of small power tools, is considering financing a plant expansion in France with euro () Eurobonds. The bond issue would be a 5-year maturity instrument with a coupon rate of 7 percent to be paid semiannually, whereas the principal repayment occurs at maturity. A compa- rable financing in U.S. dollars ($) would cost the borrower a coupon rate of 10 percent. a. Assuming the U.S. dollar depreciates at a rate of 1 percent (0.5 percent semiannually), the effective tax rate of Black & Decker U.S. is 35 percent, and the exchange losses on principal repayments are tax-deductible, which long-term financing option should be selected? On the date of the issue, 1 = $1.34. b. Would your answer change if exchange losses on principal repayment were not tax-deductible?
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a To compare the financing options we need to calculate the effective cost of debt for both the euro ... View the full answer
Related Book For
Financial Management Theory and Practice
ISBN: 978-1305632295
15th edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt
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