Question

McDougan Associates​ (U.S.). McDougan​ Associates, a​ U.S.-based investment​ partnership, borrows €85,000,000 at a time when the exchange rate is $1.3395​/€. The entire principal is to be repaid in three​ years, and interest is 6.250​% per​ annum, paid annually in euros. The euro is expected to depreciate​ vis-à-vis the dollar at 3.3​% 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	€ 85,000,000
Interest payment due in euros		€	€	€
Repayment of principal in year 3				-85,000,000
Total cash flow of euro-dominated debt	€	€	€	€
Expected exchange rate, $/€	1.3395
Dollar equivalent of euro-denominated	$	$	$	$
cash flow

Answer 1

Answer:

Sample calculation:

Interest payment for each year= 6.25%*85000000=5,312,500

dollar Equivalent of euro denominated for year 0=$1.3395

Depreciation rate =3.3%

dollar Equivalent of euro denominated for year 1=$1.3395/(1-3.3%)=$1.3852

dollar Equivalent of euro denominated for year 1=$1.3852/(1-3.3%)=$1.4325

dollar Equivalent of euro denominated for year 1=$1.4325/(1-3.3%)=$1.4814

	Year 0	Year 1	Year 2	Year 3
Proceeds from Borrowing funds	85,000,000
Interest Rate due in euros		-5312500	-5312500	-5312500
Repayment of principal in year 3				-85000000
Total cash flow of euro dominated debt in £	85000000	-5312500	-5312500	-90312500
Expected Exchange rate, $/£	1.3395
Dollar equivalent of euro denominated in $	$1.3395	$1.3852	$1.4325	$1.4814
Cash flow	$113857500	-$7358938.728	-$7610071.073	-$133786151.2