Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:McDougan Associates (USA). McDougan Associates, a US-based investment partnership, borrows €90,000,000 at a time when the exchange rate is $1 3492/E. The entire
principal is to be repaid in three years, and interest is 6.450% per annum paid annually in euros The euro is expected to depreciate vis-à-vis the dollar at 2.7% per annum. What is
the effective cost of this loan for McDougan?
outflow (Round the amount to the nearest whole number and the exchange rate to four decimal places)
Year 11
Year 2
Proceeds from borrowing euros
Interest payment due in euros
Repayment of principal in year 3
Total cash flow of euro-denominated debt
Year 0
€90,000,000
€
ETTE
13492
(5.805.000) € (5,805,000) €
90,000.000 (5,805,000) (5,805,000)
13128
Expected exchange rate, S
Dollar equivalent of euro-denominated cash flow $121.426.000 (7.620.804) $ (7.415.307) $ (119,076,034)
What is the effective cost of this loan for McDougan?
(Round to two decimal places)
Year 3
1.2774
(5,805,000)
(90,000,000)
95,005,000
12429
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