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When companies borrow in global debt markets, the cost of debt capital includes the effect of...

When companies borrow in global debt markets, the cost of debt capital includes the effect of changes in exchange rates. General Electric needs to borrow the equivalent of $100,000 for one year. GE decides to borrow yen, unhedged, in the Tokyo market. The coupon rate is 2%, and the exchange rate on the issue date is ¥115/$. The exchange rate is ¥95/$ on the day the debt obligation matures. What is GE’s before-tax dollar cost of debt capital?

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Answer #2

The company borrows $100,000 but in yen, so from then Tokyo market they actually borrowed $100,000 * 115 = ¥11,500,000.

The coupon rate is 2% so the company will have to return ¥11,500,000 + 2%(¥11,500,000) = ¥11,730,000

The exchange rate after 1 year is ¥95/$. We will have to calculate how much dollars will be required to make ¥11,730,000.

We have ¥95 = $1

1¥ = $(1/95)

= ¥11,730,000 = $(11,730,000/95)

=$123,473.684

So the cost of debt is 23.473% and 23,473.684 in dollars

answered by: anonymous
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