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