Question

Calculate the following: Show all work

1) If a U.S.-based firm borrows €1,500,000 for one year at 5.00% and during the year the euro depreciates from an initial rate of $1.30/€ to $1.10/€, what is the dollar cost of this debt?   

Your answer: ________________% (Keep two decimals; Do include the minus sign “-” if your answer is a negative number.)

2) If a U.S.-based firm borrows €1,500,000 for one year at 5.00% and during the year the euro depreciates from an initial rate of $1.30/€ to $1.10/€, what is the foreign exchange transaction cost for the firm?   

Your answer: ________________% (Keep two decimals; Do include the minus sign “-” if your answer is a negative number.)

3) If a Brazil-based firm borrows $2 million for two years at 5.00% and during the period the dollar appreciates from R$2.00/$ to R$2.80/$, what is the annualized R$ cost of this debt?   

Your answer: ________________% (Keep two decimals; Do include the minus sign “-” if your answer is a negative number.)

4) Portland Forest Products Inc. has a cost of debt of 8%, the risk-free interest rate is 3.5% and the expected return on the market portfolio is 8.5%. Portland’s tax rate is 30% and its optimal capital structure is 40% debt and 60% equity. If Portland has a beta of 1.2, what is the firm’s weighted average cost of capital?

a. 7.34% b. 10.46% c. 7.94% d. 8.90%

Answer 1

1. Ans. is -11.15%