McDougan Associates? (U.S.). McDougan? Associates, a? U.S.-based investment? par
ID: 2511641 • Letter: M
Question
McDougan Associates? (U.S.). McDougan? Associates, a? U.S.-based investment? partnership, borrows
euro€70,000,000 at a time when the exchange rate is 1.3412?/euro€. The entire principal is to be repaid in three? years, and interest is 6.550?% per? annum, paid annually in euros. The euro is expected to depreciate? vis-à-vis the dollar at 3.1?% per annum. What is the effective cost of this loan for? McDougan?
Complete the following table to calculate the dollar cost of the? euro-denominated debt for years 0 through 3. Enter a positive number for a cash inflow and negative for a cash outflow.???(Round the amount to the nearest whole number and the exchange rate to four decimal? places.)
Year 0
Year 1
Year 2
Year 3
Proceeds from borrowing euros
€
70,000,000
Interest payment due in euros
€
(4,585,000)
€
(4,585,000)
€
(4,585,000)
Repayment of principal in year 3
(70,000,000)
Total cash flow of euro-denominated debt
€
70,000,000
€
(4,585,000)
€
(4,585,000)
€
74,585,000
Expected exchange rate, $/€
1.3412
1.2996
1.2593
1.2202
Dollar equivalent of euro-denominated cash flow
$
93,884,000
$
(5,958,666)
$
(5,773,890)
$
(91,016,076)
What is the effective cost of this loan for? McDougan?
nothing?%
?(Round to two decimal? places.)
Year 0
Year 1
Year 2
Year 3
Proceeds from borrowing euros
€
70,000,000
Interest payment due in euros
€
(4,585,000)
€
(4,585,000)
€
(4,585,000)
Repayment of principal in year 3
(70,000,000)
Total cash flow of euro-denominated debt
€
70,000,000
€
(4,585,000)
€
(4,585,000)
€
74,585,000
Expected exchange rate, $/€
1.3412
1.2996
1.2593
1.2202
Dollar equivalent of euro-denominated cash flow
$
93,884,000
$
(5,958,666)
$
(5,773,890)
$
(91,016,076)
Explanation / Answer
Solution:
Let effective cost of loan is r%
Now at effective cost present value of interest and repayment in dollar value discounted at r% will be equal to amount of loan taken dollar value i.e. = $93,884,000
Lets calculate present value of repayments at 3% and 4%
Therefore effective cost of this loan = 3% + (Present value of repayment at 3% - Loan amount in dollar value) / (Present value of repayment at 3% - Present value of repayment at 4%)
3% + ($94,520,160.53 - $93,884,000) / ($94,520,160.53 - $91,980,732.56)
= 3.25%
Compuatation of Present value of Repayment Period Interest / Principal payment Effective Rate - 3% Effective Rate - 4% PV Factor Present Value PV Factor Present Value Year 1 $5,958,666.00 0.970874 $5,785,112.62 0.961538 $5,729,486.54 Year 2 $5,773,890.00 0.942596 $5,442,445.09 0.924556 $5,338,285.87 Year 3 $91,016,076.00 0.915142 $83,292,602.82 0.888996 $80,912,960.14 Total $94,520,160.53 $91,980,732.56