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Copper Mountain Group? (U
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?
Expert Solution
(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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