Question
In: Finance
The Copper Mountain Group, a private equity firm headquartered in Boulder, Colorado, borrows £4,500,000 for one...
The Copper Mountain Group, a private equity firm headquartered in Boulder, Colorado, borrows £4,500,000 for one year at 8.375% interest.
a. What is the dollar cost percent of this debt if the pound depreciates from $2.0210/£ to $1.9430/£ over the year?
b. What is the dollar cost percent of this debt if the pound appreciates from $2.0210/£ to $2.1620/£ over the year?
Solutions
Expert Solution
| Depreciating pound | Appreciating pound | ||
| Amount borrowed (£) | 4,50,00,000 | 4,50,00,000 | |
| r | Interest rate (£) p.a. | 8.375% | 8.375% |
| S1 | Spot rate ($/£) (Start of the year) | 2.0210 | 2.0210 |
| S2 | Spot rate ($/£) (End of the year) | 1.9430 | 2.1620 |
| Principcal P (£) | 4,50,00,000 | 4,50,00,000 | |
| (I = P*r) | Interest (£) | 37,68,750 | 37,68,750 |
| (A = P+I) | Amount due at the end of the year (£) | 4,87,68,750 | 4,87,68,750 |
| (A2 = A*S2) | Amount due ($) | 9,47,57,681.25 | 10,54,38,037.50 |
| (A1 = A*S1) | Amount borrowed ($) | 9,09,45,000.00 | 9,09,45,000.00 |
| (A2/A1 -1) | US dollar cost of debt | 4.1923% | 15.9360% |
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