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Homework answers / question archive / Copper Mountain Group? (U

Copper Mountain Group? (U

Finance

Copper Mountain Group? (U.S.). The Copper Mountain? Group, a private equity firm headquartered in? Boulder, Colorado, borrows ?£4,700,000 for one year at 8.375?% interest.

a. What is the dollar cost of this debt if the pound depreciates from ?$2.0240?/£ to ?$1.9440?/£ over the? year?

b. What is the dollar cost of this debt if the pound appreciates from ?$2.0240?/£ to ?$2.1630?/£ over the? year?

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(a) Original Borrowing =  £4,700,000 , Initial Exchange Rate = $ 2.0240 / £, $ Value of Borrowing = 2.0240 * 4700000 = $ 9512800

Interest Rate = 8.375 %

£ Value of Borrowing after 1 year = 4700000 * 1.08375 = £5093625

Exchange Rate after 1 year = $ 1.9440 / £

$ Value of Borrowing after 1 year = 5093625 * 1.9440 = $ 9902007

Let the $ cost of borrowing ($ interest rate) be R

Therefore, 9512800 * (1+R) = 9902007

R = [9902007 / 9512800] - 1 = 4.09%

 

 

(b) Original Borrowing =  £4,700,000 , Initial Exchange Rate = $ 2.0240 / £, $ Value of Borrowing = 2.0240 * 4700000 = $ 9512800

Interest Rate = 8.375 %

£ Value of Borrowing after 1 year = 4700000 * 1.08375 = £5093625

Exchange Rate after 1 year = $ 2.1630 / £

$ Value of Borrowing after 1 year = 5093625 * 2.1630 = $ 11017511

Let the $ cost of borrowing ($ interest rate) be R

Therefore, 9512800 * (1+R) = 11017511

R = [11017511 / 9512800] - 1 = 15.82 %

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