McDougan Associates, a U.S.-based investment partnership, borrows €75,000,000 at
ID: 2790990 • Letter: M
Question
McDougan Associates, a U.S.-based investment partnership, borrows €75,000,000 at a time when the exchange rate is $1.3381/€. The entire principal is to be repaid in three years, and interest is 6.850% per annum, paid annually in euros. The euro is expected to depreciate vis-à-vis the dollar at 3.5% 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 outfow. (Round the amount to the nearest whole number and the exchange rate to four decimal places.) Year O Year 1 Year 2 Year 3 75,000,000 Proceeds from borrowing euros Interest payment due in euros Repayment of principal in year 3 (75,000,000) Total cash flow of euro-denominated debt Expected exchange rate, SVE 1.3381 Dollar equivalent of euro-denominated cash fiowExplanation / Answer
McDOUGAN ASSOCIATES: Year 0 Year 1 Year 2 Year 3 Proceeds from borrowing euros € 75,000,000 Interest payment due in euros € (5,137,500) € (5,137,500) € (5,137,500) Repayment of principal in year 3 € (75,000,000) Total cash flow of euro denominated debt € (5,137,500) € (5,137,500) € (80,137,500) Expected exchange rate 1.3381 1.2913 1.2461 1.2025 Dollar equivalent of euro denominated cash flow € 100,357,500 € (6,634,054) € (6,401,839) € (96,365,344)