Question Details

Interaction Between Financing and Invoicing Policies 



1. Cost of Financing. Assume that Seminole, Inc., considers issuing a Singapore dollar-denominated
bond at its present coupon rate of 7 percent, even though it has no incoming cash flows to cover
the bond payments. It is attracted to the low financing rate, since U. S. dollar-denominated bonds
issued in the United States would have a coupon rate of 12 percent. Assume that either type of
bond would have a four-year maturity and could be issued at par value. Seminole needs to borrow
$10 million. Therefore, it will either issue U. S. dollar denominated bonds with a par value of $10
million or bonds denominated in Singapore dollars with a par value of S$20 million. The spot rate
of the Singapore dollar is $.50. Seminole has forecasted the Singapore dollar- value at the end of
each of the next four years, when coupon payments are to be paid:
End of Year Exchange Rate of Singapore Dollar
1 $.52
2 .56
3 .58
4 .53
Determine the expected annual cost of financing with Singapore dollars. Should Seminole, Inc.,
issue bonds denominated in U.S. dollars or Singapore dollars? Explain.
2. Interaction Between Financing and Invoicing Policies . Assume that Hurricane, Inc., is a U.S.
company that exports products to the U.K., invoiced in dollars. It also exports products to
Denmark, invoiced in dollars. It currently has no cash outflows in foreign currencies, and it plans
to issue bonds in the near future. Hurricane could likely issue bonds at par value in (1) dollars with
a coupon rate of 12 percent, (2) Danish kroner with a coupon rate of 9 percent, or (3) pounds with
a coupon rate of 15 percent. It expects the kroner and pound to strengthen over time. How could
Hurricane revise its invoicing policy and make its bond denomination decision to achieve low
financing costs without excessive exposure to exchange rate fluctuations?


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