Question

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?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
3. The cost of debt capital The cost of debt that is relevant when companies are...
3. The cost of debt capital The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt that is to be raised to finance the new project. The required return (or cost) of previously issued debt is often referred to as the      rate. It usually differs from the cost of newly raised financial capital. Consider the case of Cold Duck Brewing Company: Cold Duck Brewing Company is considering issuing...
Companies that use debt in their capital structure are said to be using financial leverage. Using...
Companies that use debt in their capital structure are said to be using financial leverage. Using leverage can increase shareholder returns, but leverage also increases the risk that shareholders bear. Consider the following case: Western Gas & Electric Co. is considering a project that will require $500,000 in assets. The project will be financed with 100% equity. The company faces a tax rate of 30%. What will be the ROE (return on equity) for this project if it produces an...
Topic: Open Market Supply SHANGHAI -- Money markets are often described as the financial system's plumbing....
Topic: Open Market Supply SHANGHAI -- Money markets are often described as the financial system's plumbing. When they work, which is most of the time, hardly anyone notices, but when they get blocked up, it creates quite a stink. That is why China's money market -- in which banks and other financial institutions borrowed some $6.4 trillion from each other last month alone to fund their daily needs -- is becoming one of the world's most important markets to watch....
How this case apply to globalization ? FREEPORT, Pa. The rising dollar is putting US. Manufacturers...
How this case apply to globalization ? FREEPORT, Pa. The rising dollar is putting US. Manufacturers through the equivalent of a new year's fitness regime, causing pain for now but also promising long-term gains in efficiency. After more than a decade of weakness, the dollar began surging in mid-2014 against the euro and many other currencies. That is making U.S.-made products pricier in other countries and imports cheaper in the U.S.-a combination that is likely to expand, the already gaping...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
Gender Bias in the Executive Suite Worldwide The Grant Thornton International Business Report (IBR) has described...
Gender Bias in the Executive Suite Worldwide The Grant Thornton International Business Report (IBR) has described itself as "a quarterly survey of business leaders from across the globe … surveying 11,500 businesses in 40 economies across the globe on an annual basis." 1 According to the 2011 IBR, the Asia Pacific region had a higher percentage (27 percent) of female chief executive officers (CEOs) than Europe and North America. Japan is the only Asia Pacific region exception. The report further...
Argentina and Ecuador: Understanding the Currency Crisis While fiscal policy is never far from the mind...
Argentina and Ecuador: Understanding the Currency Crisis While fiscal policy is never far from the mind of your average Argentine, who remembers the tough times and hyperinflation of the 1980s, the events of 2001 and 2002 have brought fiscal policy back to the forefront of public concern. Though the early 1990s may have been characterized by financial optimism, Argentina has been in a recession since Brazil's 1998 monetary crisis sent shockwaves across the regional and global markets. In early 2002,...
Sign In INNOVATION Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer From...
Sign In INNOVATION Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer From the April 2004 Issue Save Share 8.95 In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. By 2002, that figure had grown to $9.5 billion. What fashionable strategies did Progressive employ to achieve sevenfold growth in just over a decade? Was it positioned in a high-growth industry? Hardly. Auto insurance is a mature, 100-year-old industry...
What role could the governance of ethics have played if it had been in existence in...
What role could the governance of ethics have played if it had been in existence in the organization? Assess the leadership of Enron from an ethical perspective. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among the top Fortune 500 companies, collapsed in 2001 under a mountain of debt...
Discuss ethical issues that can be identified in this case and the mode of managing ethics...
Discuss ethical issues that can be identified in this case and the mode of managing ethics Enron finds itself in this case. How would you describe the ethical culture and levels of trust at Enron? Provide reasons for your assessment. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT