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Based in Berlin, with sales of over EUR 53.9 billion from more than 5200 stores Euro Hypermarkets (EH) is one of the larger European retailers. It is currently looking to grow by adding several stores in the Euro area and has been advised by its investment banks to issue a debt in the form of a public bond to raise EUR 750 million. EH's investment bankers have advised the company to issue 10- year bonds to be priced at PAR. The four currencies and the terms of the bond issue under consideration are as follows: Currency Coupon Rate (%) Euros 5.25 British Pounds 5.375 Swiss Francs 3.625 US Dollars 5.50 Euro Hypermarkets (EH) EH has been very successful in expanding its offshore operations. Exhibit 1 provides a history of EH's store portfolio from 1992 to 2001. EH was profitable in all major operating regions. In 2001 EH generated operating profits of EUR 2.8 billion on sales of EUR 69.5 billion. Of that profit 7% originated in Asia and South America, 26% in Europe outside of Germany and the remainder was generated in Germany. The regional sales breakdown was 7% from Asia, 12 % from South America and 32% from Europe outside Germany. The company's long-term objective was to increase sales at an annual rate of 5% and recurring net income by 5-10% EH Financing Policy In each country EH operated primarily within the local economy when buying and selling products. Foreign currency exposure on imported goods was generally hedged via forward contracts. In 2001 total EH borrowing were EUR 13.5 billion of which EUR 6.4 billion were in publicly traded bonds. EH's debt was denominated in many currencies. Exhibit 3 details the recent composition of EH's borrowings by currency. Foreign currency borrowings were generally hedged so that total debt requirements were currently 97% in Euros. Current Market Opportunities As EH management considered the bond denomination decision, it also considered the current inflation, interest rate and exchange rate environment. Over the past 3 years long tern bond yields had declined in all 4 currencies. The Swiss Franc's interest rate had however consistently been the lowest rate. The decision also hinged on future movement of exchange rates. Over the past 5 years the Euro had depreciated against most major currencies. Should this trend continue paying down foreign currency denominated debt with Euro denominated cashflow would become increasingly expensive. The bonds would be issued in the euro bond market therefore were subject to similar issuance costs, liquidity and specifications regardless of the currency denomination. Eurobonds uniformly followed an annual coupon convention. Exhibits 4,5 and 6 provide information on trends in inflation, government benchmark bond yields and exchange rates in the various currencies. Exhibits 7 and 8 provide information on Instructions: Please read the attached case and answer the single question at the end. You are limited to one half of one page of text for your answer plus any calculations (excel based would be preferred) that you may use to support your answer. You may attach any such calculations separately in your email. Please answer the following question: Which bond would you advise EH's management to issue and why? Please provide all analysis that supports your recommendation

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