IBM is considering having its German affiliate issue a 10- year, $100 million bond denominated in euros and priced to yield 7.5%. Alternatively, IBM’s German unit can issue a dollar-denominated bond of the same size and maturity and carrying an interest rate of 6.7%. a. If the euro is forecast to depreciate by 1.7% annually, what is the expected dollar cost of the eurodenominated bond? How does this compare to the cost of the dollar bond? b. At what rate of euro depreciation will the dollar cost of the euro-denominated bond equal the dollar cost of the dollar-denominated bond? c. Suppose IBM’s German unit faces a 35% corporate tax rate. What is the expected after-tax dollar cost of the euro-denominated bond?
IBM is considering having its German affiliate issue a 10-
year, $100 million bond denominated in euros and priced
to yield 7.5%. Alternatively, IBM’s German unit can issue
a dollar-denominated bond of the same size and maturity
and carrying an interest rate of 6.7%.
a. If the euro is
of the dollar bond?
b. At what rate of euro depreciation will the dollar cost of
the euro-denominated bond equal the dollar cost of the
dollar-denominated bond?
c. Suppose IBM’s German unit faces a 35% corporate tax
rate. What is the expected after-tax dollar cost of the
euro-denominated bond?
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