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yanalaym [24]
2 years ago
10

3. A U.S. MNC needs to raise capital of $100 million by issuing bonds. The firm can either raise US$ at 5% interest rate or issu

e foreign bond in Germany denominated in Euro at 6%. The Euro is expected to depreciate by 2% in the following year. What is the best alternative and how much is the effective dollar cost
Business
1 answer:
Y_Kistochka [10]2 years ago
7 0

1. The best alternative for raising $100 million in bonds is <u>B. Borrow Euro.</u>

2. The effective dollar cost of the U.S. MNC is <u>B</u><u>. approximately </u><u>5%.</u>

<h3>What is the effect of borrowing the Euro?</h3>

If the U.S. multinational company (MNC) borrows the $100 million by issuing Euro bonds, it will cost it $5 million annually but it will gain from the depreciation of the Euro by 2%.

The depreciation of the Euro reduces the effective interest rate of 6% for borrowing in the Euro to <u>4%</u> (6% - 2%).

<h3>Answer Options:</h3>

A. Borrow dollars and the effective dollar cost is approximately 4%.

B. Borrow Euro and the effective dollar cost is approximately 5%.

C. Borrow Euro and the effective dollar cost is approximately 7%.

D. Borrow dollars and the effective dollar cost is approximately 5%.

Thus, the best alternative and the effective dollar cost of the U.S. MNC raising capital of $100 million through the issuance of bonds is <u>B. Borrow Euro and the effective dollar cost</u> is approximately <u>5%</u><u>.</u>

Learn more about foreign bonds at brainly.com/question/26271508

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