Question

Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.3 ​million, a​ one-year period, an initial spot rate of SF1.4700​/$, a 5.125​% cost of​ debt, and a 30​% tax​ rate, what is the effective​ after-tax cost of debt for one year for a U.S.​ dollar-based company if the exchange rate at the end of the period​ was:

a. SF1.4700​/$ i have the answer to this one which is 3.5875% but cant seem to figure out how to do the rest of them

b. SF1.4100​/$

c. SF1.3780​/$

d. SF1.5620​/$

Answer 1

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Answer:

a. If the exchange = 1.41/$

We first calculate the percentage change in the exchange rate, s = ( S1 - S2 ) / (S2)x100 =1.47-1.41 /1.41 x100=4.25532%

kd= [ ( 1 + kd in SF) x ( 1 + s ) ]- 1 =[(1+.05125)x(1+0.0425532)=9.5984%

b. If the exchange ends the period at SF1.3780/$:

We first calculate the percentage change in the exchange rate, s = ( S1 - S2 ) / (S2)x100 =(1.47-1.3780)/1.3780*100=6.676343%

We then calculate the effective cost of debt after exchange rate changes

kd= [ ( 1 + kd in SF) x ( 1 + s ) ]- 1 =[(1+.05125)x(1+0.06676343)=12.1435%

c. If the exchange ends the period at SF1.5620/$:

We first calculate the percentage change in the exchange rate, s = ( S1 - S2 ) / (S2)x100=-5.88988%

We then calculate the effective cost of debt after exchange rate changes

kd= [ ( 1 + kd in SF) x ( 1 + s ) ]- 1 =[(1+.05125)x(1-0.058898)]=9.8933%.