Question

McDougan Associates? (U.S.). McDougan? Associates, a? U.S.-based investment? partnership, borrows

euro€85,000,000 at a time when the exchange rate is ?$1.3304?/euro€. The entire principal is to be repaid in three? years, and interest is 6.350?% per? annum, paid annually in euros. The euro is expected to depreciate? vis-à-vis the dollar at 3.1?% 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-denominated debt	€		€		€		€
Expected exchange rate, $/€		1.3304
Dollar equivalent of euro-denominated cash flow	$		$		$		$

What is the effective cost of this loan for? McDougan?

Answer 1

McDOUGAN ASSOCIATES (U.S):

	Year 0	Year 1	Year 2	Year 3
Proceeds from borrowing euros	€85,000,000
Interest payment due in euros		€(5,397,500)	€(5,397,500)	€(5,397,500)
Repayment of principal in year 3				€(85,000,000)
Total cash flow of euro-denominated debt		€(5,397,500)	€(5,397,500)	€(90,397,500)
Expected exchange rate , $/€	1.3304	1.2892	1.2492	1.2105
Dollar equivalent of euro denominated cash flow	$113,084,000	$(6,958,457)	$(6,742,557)	$(109,426,174)