Collette, Inc., is considering issuing an Canadian dollardenominated bond at its present coupon rate of 10 percent, eventhough it has no incoming cash flows to cover the bond payments. U.S. dollar-denominated bonds issued in the United States would havea coupon rate of 9 percent. Either type of bond would have a 4-yearmaturity and could be issued at par value. Collette needs to borrow$10 million. Therefore, it will either issue U. S. dollardenominated bonds with a par value of $10 million or bondsdenominated in Canadian dollars with a par value of C$13 million.The spot rate of the Canadian dollar is $.77. Collette hasforecasted the Canadian dollar’s value at the end of each of thenext four years, when coupon payments are to be paid at: Year 1$0.76, Year 2 $0.75, Year 3 $0.74, and Year 4 $0.73.
(1) Calculate the expected annual cost of financing, as apercentage, with Canadian dollars.
(2) Should Collette, Inc., issue bonds denominated in U.S.dollars or Canadian dollars? Explain.
