Question

Foreign Exchange Risk and the cost of Borrowing Swiss Francs. The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.4 million, a one-year period, an initial spot rate of SF1.5300/$, a 4.515% cost of debt, and a 35% tax rate, what is the effective after-tax cost of debt for one year for a U.S. dollar-based company if the exchange rate at the end of the period was: a. SF1.5300/$ b. SF1.4500/$ c. SF1.3850/$ d. SF1.6650/$ a. If the exchange rate at the end of the period was SF1.5300/$, what is the effective after-tax cost of debt? | % (Round to four decimal places.)

Answer 1

1.
=(1.4/1.53*(1.04515-0.04515*35%))/(1.4/1.53)-1
=2.9348%

2.
=(1.4/1.45*(1.04515-0.04515*35%))/(1.4/1.53)-1
=8.6139%

3.
=(1.4/1.385*(1.04515-0.04515*35%))/(1.4*1.53)-1
=-51.4241%

4.
=(1.4/1.665*(1.04515-0.04515*35%))/(1.4*1.53)-1
=-59.5930%