Gobal Financial Investment Essay Example | Topics and Well Written Essays - 750 words

Gobal Financial Investment - Essay Example This paper illustrates that the first option available to the UAL, Inc. is to borrow the required investment amount of $500 million in the local currency that is US Dollars. At the initiating stage of the loan agreement, the company has to pay an underwriting fee of 0.5% of the total principal amount and therefore, it is added to the cost of borrowing. This option does not involve in exchange rate risk, however, there is surely an element of the change in the inflation rate which could affect the time value of the currency over a period of 10 lean years. However, this element has been ignored for this report. The company can borrow $500 million at a rate of 11% with two semiannual interest payments due in June and December every year. This implies that the rate which is quoted annually needs to be adjusted for semiannual payments and the number of payment periods will also be adjusted for the same reason. The interest rate adjusted will be 11% divided by 2 which is equal to 5.5% of t he total principal amount to be paid semiannually. The total number of payment periods will, therefore, be 20 as the loan period is for 10 years. Moreover, there are no principal repayments during the 10 years tenure and the whole amount of $500 million is to be settled at the end of the loan term. By placing the available information in the following table and calculating the future value it can be ascertained that the future value of borrowing under this option is $1,458,878,745. This value will be compared with the future value obtained under the second option. The second option available to the company is to borrow $500 million denominated in Japanese Yen from the leading Japanese Bank. The current exchange rate between US Dollars and Japanese Yen is at 250 which will result in borrowing of JPY 125 billion at an annual interest rate of 5%. Since the interest payments are semiannual therefore this rate has to be adjusted along with the number of payment periods as in the previous option.