Question

Part B: The CEO of BHP BILLITON has decided to borrow $10M to generate interest tax shields and thus raise the value of the firm. The debt is issued at face value. Since the firm is currently all equity, treat the debt as in the Australian market, it will have to pay 7.5 % interest. If the firm borrows in the Japanese market it will have to pay 5 %. Assume that there are no barriers to borrowing abroad. (10) having zero default risk. If BHP BILLITON borrows regulatory or tax buy YEN and sell dollars one year hence through price of (c) BHP BILLITON can futures/forward contract. Suppose BHP BILLITON can lock in YEN124.046/S for a June 2009 delivery. The forward market seems to imply that the yen is going to appreciate and the dollar is going to depreciate. Which is better from BHP BILLITON 's perspective ---borrowing in Australia or borrowing in Japan and entering into the forward contract to buy YEN next year. Explain.