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TropiKana Inc
TropiKana Inc., a U.S firm, has just borrowed euro 1,000,000 to make improvements to an Italian fruit plantation and processing plant. If the interest rate is 5.50% per year and the Euro appreciates against the dollar from $1.40/€ at the time the loan was made to $1.45/€ at the end of the first year, what is the before tax cost of capital if the firm repays the entire loan plus interest (rounded)?
Expert Solution
Computation of the before tax cost of capital:-
Borrowed amount = 1,000,000*$1.40
= $1,400,000
Amount paid after one year = 1,000,000*(1+5.50%)*$1.45
= $1,529,750
Before tax cost of capital = (Amount paid after one year - Borrowed amount) / Borrowed amount
= ($1,529,750 - $1,400,000) / $1,400,000
= $129,750 / $1,400,000
= 9.27%
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