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Ray Atkinson
Ray Atkinson, Graduate Student
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UAL Borrowing Case: May 1985 It is May 1985 and UAL, Inc.,

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UAL Borrowing Case: May 1985

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 (¥). As background, UAL, Inc. owns United Airlines and Westin Hotels. It is buying Hertz from RCA. United Airlines will generate about 80% of the UAL revenue and the remainder will be evenly split between Hertz and Westin. United Airlines, Hertz, and Westin Hotels are worldwide service companies that generate revenue in many countries and currencies, mainly in the U.S., Canada, Latin America, and Europe. The Treasurer considers this to be a “No Brainer” or easy choice.

If the loan is in U. S. Dollars in the USA, company policy requires the use of a specific investment banker. This firm estimates 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 approximately 0.5% to be paid when the 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. Each student must (a) recommend one alternative and (b) discuss why your alternative is wise.

You can find historical currency rates at This link is provided to allow the reader to check the exchange rates included in the case

Ray Atkinson :

Can you please confirm the interest rate for the yen calculcations? It is 5% annual interest or 5% semiannual interest (meaning 10% annual interest)? If these numbers are accurate, the difference between the choices is staggering.


Good question, its paid annually

Ray Atkinson :

Than I will do it as it is written.
Doing it in dollars goes as follows:
Borrow $500,000,000. Pay (500,000,000*0.005) $2,500,000 in fees. Over the course of the loan, pay 20 interest payments of (500,000,000 * 0.11 * 0.5) $27,500,000 each totalling $550,000,000. Total interest and fees comes to $580,000,000
Doing it in yen goes as follows
Borrow ¥125,000,000,000. There are no fees. There are the same 20 interest payments, but this time they are (125000000000 * 0.05 * 0.5) ¥3,125,000,000 totaling 62,500,000,000. Converting this back to dollars to compare, the total interest payments come to $250,000,000.
Borrowing the money in yen saves $330 million. I cannot see any reason to borrow in dollars and pay twice as much.


Thanks! I appreciate the help!

Ray Atkinson :

You are quite welcome. Please accept and rate my answer.


Will do.

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