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Ray Atkinson
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It is May 1985 and UAL, Inc., parent of United Airlines, needs

Customer Question

It is May 1985 and UAL, Inc., parent of United Airlines, needs to borrow $500 million to finance the purchase of Hertz. You are Assistant Treasurer and must make a recommendation about the choice between borrowing in the USA in U. S. Dollars or in Japan in Yen (¥). If the loan is in U. S. Dollars in the USA, company policy requires the use of a specific investment banker. This firm describes the terms of the USA loan as follows: An interest rate of 11% per year paid semi-annually in December and June for 10 years. The principal of $500 million would be repaid at the end of the 10-years. There would be a one-time underwriting fee of 0.5% to be paid when the loan funds are received.

A leading Japanese bank is offering a loan with the interest and principal denominated in Yen. The interest rate will be 5% and there are no upfront fees. Both loans require interest payments in December and in June. The entire principal is due in June 1995.

In May 1985, the exchange rate fluctuated between 250 and 252 yen to the dollar. For convenience, use 250 ¥ to the $ as the exchange rate in May 1985. Each student must (a) recommend one alternative and (b) discuss why your alternative is wise.


You can find historical currency rates at http://www.oanda.com/convert/fxhistory. This link is provided to allow the reader to check the exchange rates included in the case.
Submitted: 1 year ago.
Category: Homework
Expert:  Ray Atkinson replied 1 year ago.
Do you want me to set this up in a spreadsheet?
Customer: replied 1 year ago.


Yes please

Expert:  Ray Atkinson replied 1 year ago.
Okay, will do. How soon do you need it?
Customer: replied 1 year ago.

By 10:00pm

Expert:  Ray Atkinson replied 1 year ago.
I assume that you are in the Eastern Time Zone and you need it in an hour. Off I go.
Customer: replied 1 year ago.


Yes thank you

Expert:  Ray Atkinson replied 1 year ago.
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Ray Atkinson, Graduate Student
Category: Homework
Satisfied Customers: 1790
Experience: Degrees in Math, Education and Accounting, years and years of tutoring.
Ray Atkinson and 8 other Homework Specialists are ready to help you
Customer: replied 1 year ago.
Is their more details to the compassion of the US dollar to the yen ?
Expert:  Ray Atkinson replied 1 year ago.

It is stated to use ¥250=$1. Do you want me to run through the exchange rates for each payment?

Customer: replied 1 year ago.
Ok thanks
Customer: replied 1 year ago.
Yes please
Expert:  Ray Atkinson replied 1 year ago.
Please note that oanda.com only goes back to 1990 for historical rates. Finding the rates in 1985-1995 is going to take some time. I recommend turning in the work I have done so you are not late, and I will get the rates. It is likely not going to make any significant difference.
Customer: replied 1 year ago.
Is there any detail to what formulas in excel that was used to get the rates for each bank
Expert:  Ray Atkinson replied 1 year ago.
I multiplied by 250 for the ¥. I see that the exchange rates changed *quite* significantly from 1985 to 1995. I will make the adjustments.
Customer: replied 1 year ago.
Ok
Expert:  Ray Atkinson replied 1 year ago.
It is still going to take me some time.
Expert:  Ray Atkinson replied 1 year ago.
I made a major mistake and I am so glad you had me run through the semi-annually rates. I assumed that they did not change radically, but they did. I am remaking the entire chart to reflect my findings.

Point out to your instructor that the link he is using is outdated.
Expert:  Ray Atkinson replied 1 year ago.
It is still a better deal to go with the Japanese bank, but not as huge of a difference as I thought.

Attachment: 2012-11-26_032606_yen_wins.xls

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