Question

Question 1: You are borrowing USD 1000 for one year, at a coupon rate of 7.7%. You will get the money today, and will repay all principal and interest one year from today. If the current CAD per USD spot rate is 0.95, the CAD inflation rate is 3%, and the USD inflation rate is 1.6%, what is the CAD cost of debt for this loan?

Question 2: The current MXN/CHF spot exchange rate is 26.5. The MXN inflation rate is 6.9%, and the CHF inflation rate is 0.7%. If you are a Mexican firm with a MXN cost of capital for foreign projects of 9%, what is the PV (in MXN) of a payment of 2M CHF 4 years from today?

Question 3: You are the CEO of an American company considering investing in Brazil. Your BRL cost of capital is 19.4%, and your USD cost of capital is 11.8%. The project you are considering will cost 20M BRL to set up, and will produce free cash flows of 2.9M BRL per year in perpetuity, starting one year from today. Brazil and the US have the same inflation rate, and the current spot exchange rate is USD 0.17 per BRL. What is the NPV of this project (in the appropriate currency) from the project viewpoint?

Question 4: You are the CEO of an American company considering investing in Brazil. Your BRL cost of capital is 16.9%, and your USD cost of capital is 15.9%. The project you are considering will cost 21M BRL to set up, and will produce free cash flows of 2.7M BRL per year in perpetuity, starting one year from today. Brazil and the US have the same inflation rate, and the current spot exchange rate is USD 0.24 per BRL. What is the NPV of this project (in the appropriate currency) from the parent viewpoint?

Answer 1

You have asked multiple unrelated questions in the same post. I have addressed the first one. Please post the balance questions separately one by one.

Question 1: You are borrowing USD 1000 for one year, at a coupon rate of 7.7%. You will get the money today, and will repay all principal and interest one year from today. If the current CAD per USD spot rate is 0.95, the CAD inflation rate is 3%, and the USD inflation rate is 1.6%, what is the CAD cost of debt for this loan?

Maturity value of the loan to be repaid after 1 year in USD = Principal + coupon = 1,000 + 1,000 x 7.7% = 1,077

Exchange rate a year later = Spot rate x (1 + iCAD) / (1 + iUSD) = 0.95 x (1 + 3%) / (1 + 1.6%) = CAD 0.9631 / USD

Please see the table below:

Parameter	USD	Exchange rate (CAD / USD)	CAD
Amount borrowed at t = 0	1000	0.95	950.00
Amount to be paid back at t = 1 (Principal 1,000 + annual interest @ 7.7%)	1077	0.9631	1,037.25

Hence, the CAD cost of debt for this loan = Amount paid back in CAD / Amount borrowed in CAD - 1

= 1,037.25 / 950 - 1 = 9.18%