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%

jeff jeffy answered 1 year ago
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