Foreign currency borrowing, based on the following exchange rates for one euro:

ID: 2408338 • Letter: F

Question

Foreign currency borrowing, based on the following exchange rates for one euro:

   • September 30, 2015 . . . . . . . . . . . . . . . .    $0.110
   • December 31, 2015 . . . . . . . . . . . . . . . .     $0.115
   • September 30, 2016 . . . . . . . . . . . . . . . .    $0.130
   • December 31, 2016 . . . . . . . . . . . . . . . .     $0.135
   • September 30, 2017 . . . . . . . . . . . . . . . .    $0.160

Assessment 3: Foreign Currency Exercise 1 Worksheet: Foreign Currency Borrowing On September 30, 2015, Dolphin Incorporated negotiated a 1,000,000 euro, two-year loan from a German bank. The annual interest on the loan is 2%. Dolphin makes annual interest payments on September 30. Dolphin will repay the loan principal on September 30, 2017. Dolphin prepares December 31 year-end financial statements in U.S. dollars.

Step 2: Determine the effective cost (in U.S. dollars) of borrowing in 2015, 2016, and 2017. Use Table 2 below as a worksheet. Table 2: Effective Cost of Borrowing 2015 2016 2017

Explanation / Answer

2015 (0.115-0.110)/0.110 =0.045 = 0.05 ((1+0.02)*(1+0.05))-1 =0.071 1000000*0.071 71000 2016 (0.135-0.115)/0.115 =0.174 =0.17 ((1+0.02)*(1+0.17))-1=0.194 1000000*0.194 194000 2017 (1.60-1.35)/1.35 = 0.185 = 0.19 ((1+0.02)*(1+0.19))-1 = 0.214 1000000*0.214 214000

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Foreign currency borrowing, based on the following exchange rates for one euro:

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