Question
In: Finance
McDougan? Associates, a? U.S.-based investment? partnership, borrows euro90,000, 000 at a time when the exchange rate...
McDougan? Associates, a? U.S.-based investment? partnership, borrows euro90,000, 000 at a time when the exchange rate is ?$1.3341?/euro. The entire principal is to be repaid in three? years, and interest is 6.650?% per? annum, paid annually in euros. The euro is expected to depreciate? vis-à-vis the dollar at 3.2?% per annum. What is the effective cost of this loan for? McDougan?
Interest Payment due in euros
Year 0 90,000,000
Year 1
Year 2
Year 3
Total Cash flow of euro-dominated debt
Year 0
Year 1
Year 2
Year 3
Expected exchange rate $/euro
Year 0-1.3341
Year 1?
Year 2?
Year3?
Dollar equivalent of euro-denominated cash flow
Year 0 $?
Year 1$?
Year 2$?
Year3 $?
What is the effective cost of this loan for? McDougan?
Solutions
Expert Solution
| Input | ||||
| Principal Borrowed in Euros | € 90,000,000 | |||
| Interest Rate | 6.65% | |||
| Current Exchange rate | $1.3341/euro | |||
| Depreciation in euro | -3.20% | |||
| Output | ||||
| Cash Flow | Year 0 | Year 1 | Year 2 | Year 3 |
| Amount Borrowed | € 90,000,000 | |||
| Interest Payment at 6.65% | € (5,985,000) | € (5,985,000) | € (5,985,000) | |
| Amount repaid | € (90,000,000) | |||
| Total Cash Flow | € 90,000,000 | € (5,985,000) | € (5,985,000) | € (95,985,000) |
| Exchange rate | 1.3341 | 1.2914 | 1.2501 | 1.2101 |
| (Rate x (1-3.2%) | ||||
| Cash flow in $ | $ 120,069,000.00 | $ (7,729,081.67) | $ (7,481,751.05) | $ (116,149,628.57) |
| IRR | 3.24% | |||
| IRR(Values 0 to 3) | ||||
| So effective rate is 3.24% |
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