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
b) Borrowing British pounds from the Royal Bank of London at 10% interest rate
c) Borrowing Euros from the Deutsche Bank in Frankfurt at 5% interest rate
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!
