Long-Term Debt Financing

While one way to arrange financing for a multinational corporation is to sell equity shares, another way is to use debt financing. However, both options are not cost free.

Suppose CF Industries Holdings Inc. considers issuing a Chinese Yuan Renminbi () denominated bond in China. The Chinese investors are willing to accept a coupon rate of 6%.

Based on the level of risk, if CF Industries Holdings Inc. sells a U.S. dollar-denominated bond in the United States, it would have a coupon rate of 8%. Remember, the higher the risk, the higher the coupon rate

Assume that either type of bond would have a four-year maturity and will be issued at par value. CF Industries Holdings Inc. needs to borrow $8,000,000. Therefore, it will issue either U.S. dollar-denominated bonds at par value of $8,000,000 or bonds denominated in Chinese Yuan Renminbi with par value of 50,000,000. The spot rate of Chinese Yuan Renminbi is $.16.

The CF Industries Holdings Inc. has forecasted the Chinese Yuan Renminbi value at the end of each of the next four years when coupon payments are to be paid (see Table 1).

Table 1: Forecasted Exchange Rate of Chinese Yuan Renminbi

End of Year	Exchange rate of Chinese Yuan Renminbi ()
1	$.15
2	$.16
3	$.14
4	$.17

Note:The information in the above case is hypothetical information.

Based on the above information, calculate the expected cost of long-term debt financing with the Chinese Yuan Renminbi () and the U.S. dollars ($).

Based on your analysis and findings, what would you recommend to CF Industries Holdings Inc.? Should CF Industries Holdings Inc. issue bonds denominated in U.S. dollars or Chinese Yuan Renminbi? Explain your reasoning.