Lufthansa Airlines, headquartered in Cologne, Germany, needs US$13,500,000 for two years to finance working capital. The airline has two alternatives for borrowing: Borrow $13,500,000 in New York at 6.00% per annum. Borrow €10,000,000 in Cologne at 3.00% per annum, and exchange these euro at the present exchange rate of $1.35/€ for U.S. dollars. For both loans, Luftansa will make no payments until the end of two years, when principal and accumulated interest will be paid. At what ending exchange rate would Lufthansa be indifferent between borrowing U.S. dollars and borrowing euro?
Lufthansa Airlines, headquartered in Cologne, Germany, needs US$13,500,000 for two years to finance working capital. The airline has two alternatives for borrowing: Borrow $13,500,000 in New York at 6.00% per annum. Borrow €10,000,000 in Cologne at 3.00% per annum, and exchange these euro at the present exchange rate of $1.35/€ for U.S. dollars. For both loans, Luftansa will make no payments until the end of two years, when principal and accumulated interest will be paid. At what ending exchange rate would Lufthansa be indifferent between borrowing U.S. dollars and borrowing euro?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Lufthansa Airlines, headquartered in Cologne, Germany, needs US$13,500,000 for two years to finance working capital. The airline has two alternatives for borrowing:
- Borrow $13,500,000 in New York at 6.00% per annum.
- Borrow €10,000,000 in Cologne at 3.00% per annum, and exchange these euro at the present exchange rate of $1.35/€ for U.S. dollars.
For both loans, Luftansa will make no payments until the end of two years, when principal and accumulated interest will be paid.
At what ending exchange rate would Lufthansa be indifferent between borrowing U.S. dollars and borrowing euro?
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