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 SF1.4800/$, a

5.401% cost of debt, and a 34% 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. SF1.4800/$

b. SF1.4100/$

c. SF1.3450/$

d. SF1.6150/$

a. If the exchange rate at the end of the period was SF1.4800/$, what is the effective after-tax cost of debt?

% (Round to four decimal places.)

b. If the exchange rate at the end of the period was SF1.4100/$, what is the effective after-tax cost of debt?

% (Round to four decimal places.)

c. If the exchange rate at the end of the period was SF1.3450/$, what is the effective after-tax cost of debt?

% (Round to four decimal places.)

d. If the exchange rate at the end of the period was SF1.6150/$, what is the effective after-tax cost of debt?

% (Round to four decimal places.)

Foreign Eschange Risa andthe Cost of Borrowng Swiss Francs. The chapter demensested that·fim borrowing i. of debt ofdebe for one oul 48004 based company if the exchange rate at the end of the peried was: SF14860s Click the icon to seeWorked Solution (Formula Selution a the exchange rate at the end of the period was 5F1.403 what is the effective after-tax cost of delbt -s(Round to b. the eschange rate at the end of the peried was SF141001, what is the effecsive after-ax cost e deb? % (Round to four decimal places.) c. H the exchange rate at the end of the period was SF1 345, what is the effective after-tax cost of debt? (Reund to four decimal places.) d, "the exchange rote atmeend ofthe period wes SF1启150. what is the e cive ater-tax cost ee deer? % (Round to four decimal places.)

Answer 1

Initial spot rate, S0 = SF1.4800/$

Exchange rate at period end (S1)	% change in spot rate Sf = (S1-S0)/S0	Interest on debt (Kd)	Before tax cost of debt =((1+Sf)*(1+Kd))-1	After tax cost of debt =Before tax cost*(1-tax)
a. SF1.4800/$	0.00%	5.40%	5.40%	3.56%
b. SF1.4100/$	-4.73%	5.40%	0.42%	0.27%
c. SF1.3450/$	-9.12%	5.40%	-4.21%	-2.78%
d. SF1.6150/$	9.12%	5.40%	15.02%	9.91%