Lufthansa Airlines, headquartered in Cologne, Germany, needs US$13,500,000 for two years to finance working capital. The airline has two alternatives for borrowing:Borrow $13,500,000 in New York at 6.00% per annum.Borrow €10,000,000 in Cologne at 3.00% per annum, and exchange these euro at the present exchange rate of $1.35/€ for U.S. dollars.For both loans, Luftansa will make no payments until the end of two years, when principal and accumulated interest will be paid.At what ending exchange rate would Lufthansa be indifferent between borrowing U.S. dollars and borrowing euro?

A firm running an international business runs the risk of losing money as a result of currency…

Answered: Lufthansa Airlines, headquartered in…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 14P

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Lufthansa Airlines, headquartered in Cologne, Germany, needs US$13,500,000 for two years to finance working capital. The airline has two alternatives for borrowing:

Borrow $13,500,000 in New York at 6.00% per annum.
Borrow €10,000,000 in Cologne at 3.00% per annum, and exchange these euro at the present exchange rate of $1.35/€ for U.S. dollars.

For both loans, Luftansa will make no payments until the end of two years, when principal and accumulated interest will be paid.

At what ending exchange rate would Lufthansa be indifferent between borrowing U.S. dollars and borrowing euro?

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