International Financial Management 2nd Edition by Geert Bekaert ,Robert Hodrick

Exercise 15

Suppose Viacom can issue $100,000,000 of debt at an AIC of 9.42%, whereas Gaz de France can issue $100,000,000 of debt at an AIC of 10.11%. Supposethat the exchange rate is $1.35/€. If Viacom issues euro-denominated bonds equivalent to $100,000,000, its AIC will be 8.27%, whereas if Gaz de France issues such bonds, its all-in cost will be 9.17%. Which firm has a comparative advantage when borrowing euros Why