MKT 564 Global Marketing

Final Exam

Question #1 (50 points)

XCF Company wants to raise $9 million with debt financing to finance the entry into a foreign market. These funds are needed to finance working capital, and XCF will repay them with interest in one year. The company is considering three options:

a) Borrowing U.S. dollars from a U.S. bank at 8% interest rate

A= $9,000,000 x 1.09 Total Payment @1yr = $9,810,000 USD

b) Borrowing British pounds from the Royal Bank of London at 10% interest rate

A=$9,000,000/2 = $4,500,000 GBP =$4,500,000 x 1.1 =$4,950,000 GBP
GBP has depreciated by 10% ………..1 GBP = 2 x .90 = 1.80 USD =4,950,000 x 1.80 Total Payment @1yr =$8,959,500 USD

c) Borrowing Euros from the Deutsche Bank in Frankfurt at 5% interest rate

=$9,000,000/1.5 =$6,000,000 EURO =$6,000,000 x 1.05 =$6,300,000 EURO
EURO has depreciated by 5% ………..1 EURO = 1.5 x 1.05 = 1.575 USD =6,300,000 x 1.575
Total Payment@1yr =$9,922,500 USD

The figures show that it would be best to borrow from the Royal Bank of London because it will be the least amount of cash outflow at the end of one year.

If XCF borrows in foreign currency, they will have to convert it immediately in dollars at today’s spot rate. In one year’s time, they will have to pay back the bank in the currency they borrowed it plus interest. To do so, they will convert U.S. dollars using the spot rate in a year’s time.

Currently, the exchange rates are: 1 Euro = $1.50 and 1 British Pound = $2.00. The estimate of XCF’s CFO is that in one year, the British Pound will depreciate relative to the U.S. Dollar by 10% and the Euro will appreciate relative to the U.S. Dollar by 5%. From which bank should XCF borrow and why? Show all your calculations!

Question #2 (75 points)

A small Canadian