Question

Refer to the information below for Questions 17 to 20. Assume that Total SA, a world leading oil and gas company headquartered in in La defense, France, borrows SFr 100,000,000 for ten years commencing January 1, 2015 for its new exploration project. According to the terms of the loan, Total SA pays interest at the end of each year and pays back the principle at the end of ten years. On the borrowing date, the relevant financial information is: Spot = SFr1.20/€ i€ = 5.0% iSFr = 3.0% Suppose that on December 31, 2015, the spot rate is SFr1.00/€. 17. What is Total’s interest expense for the Swiss franc debt for year 2015, measured in €? Your answer: €_______________. (Keep two decimals; Do not include currency symbols in your answer) 18. When Total’s Swiss franc debt is translated to € at the end of 2015, how much is the translation gain or loss (do not consider the interest expense; if it is a loss, put a negative sign “-” in your answer)? Your answer: €___________________. (Keep two decimals; Do not include currency symbols in your answer; Do include the negative sign, “-” in your answer if your answer is a negative number) 19. Suppose Total has an operation in Switzerland with a total Swiss franc denominated asset of SFr 200,000,000 at the beginning of 2015. At the end of 2015, how much is Total’s translation gain or loss for its assets and liabilities (i.e. SFr 100,000,000) (do not consider the interest expense; if it is a loss, put a negative sign “-” in your answer)? Your answer: €___________________. (Keep two decimals; Do not include currency symbols in your answer; Do include the negative sign, “-” in your answer if your answer is a negative number) 20. Suppose Total’s Swiss franc assets generate a 5% return on assets in Swiss francs each year for the next year starting from January 1, 2015. Ignoring any tax complications, what is Total’s net Swiss franc cash flow each year that is exposed to exchange rate changes (include the negative sign “-” in your answer if the net Swiss franc cash flow is a negative number)? Your answer: SFr___________________. (Keep two decimals; Do not include currency symbols in your answer; Do include the negative sign, “-” in your answer if your answer is a negative number)

Answer 1

17. We find present value first of the debt which comes 117.06 Million and then interest on that @ of 3% = SFr3.512 Million . Now convert it Euro that is 3.512 / 1.2 = Euro 2.93

18. Translation loss = 2.93 - 3.512 = -0.585

19. Translation gain when 200 Million assets is given = 82.9

20. Net interest = 200 x 5% - 3.512

                       = 10 - 3.512 = 6.488