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McDougan Associates? (USA)
McDougan Associates? (USA). McDougan? Associates, a? U.S.-based investment? partnership, borrows €75,000,000 at a time when the exchange rate is ?$1.3423?/€. The entire principal is to be repaid in three? years, and interest is 6.150?% 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
€
75,000,000
Interest payment due in euros
€
€
€
Repayment of principal in year 3
(75,000,000)
Total cash flow of euro-denominated debt
€
€
€
€
Expected exchange rate, $/€
1.3423
Dollar equivalent of euro-denominated cash flow
$
$
$
$
Expert Solution
| Computation of Dollar Equivalent of Euro-denominated Cash Flow: | ||||
| Year 0 | Year 1 | Year 2 | Year 3 | |
| Proceeds from Borrowing Euros | 75000000 | |||
| Interest payment due in Euros | -4612500 | -4612500 | -4612500 | |
| Repayment of principal | -75000000 | |||
| Total cash flow of euro-denominated debt (a) | 75000000 | -4612500 | -4612500 | -79612500 |
| Expected Exchange rate, $/€ (b) | 1.3423 | 1.3007 | 1.2604 | 1.2213 |
| Dollar equivalent of euro-denominated cash flow (a*b) | $100,672,500.00 | -$5,999,426.63 | -$5,813,444.40 | -$97,230,424.81 |
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