Graham Enterprises Limited (Graham) has just negotiated 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 of ownership to 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 installments 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; 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.