Mcdougan associates, a u. s. based investment partnership, borrows eur 80,000,000 at a time when the exchange rate is usd1.3460/eur. the entire principal is to be repaid in three years, and interest is 6.250% per annum paid annually in euros. the euro is expected to depreciate vs. the dollar at 3% per annum. what is the effective cost of this loan for mcdougan associates?

The effective cost of this loan for McDougan Associates: 3.06%.

Explanation:

* The exchange rate over the 3-year of borrowing is:

Y1: USD/EUR: 1.3460 x ( 1 -3%) = 1.3056

Y2: USD/EUR: 1.3460 x ( 1 -3%)^2 = 1.2665

Y3: USD/EUR: 1.3460 x ( 1 -3%)^3 = 1.2285

* Interest payment in USD at each year are and principal payment at the end of 3 years:

Y1: 80,000,000 x 6.250% x 1.3056 = $6,528,000

Y2: 80,000,000 x 6.250% x 1.2665 = $6,332,500

Y3: (80,000,000 x 6.250%+80,000,000) x 1.2285 = $104,422,500.

* Principal borrowing at the beginning in term of USD = 80,000,000 x 1.3460 = $107,680,000.

=> Effective cost of this loan ( denoted as x) is equal to the discount rate of future repayment ( in term of USD) that equalize the net present value of future repayment to its principal borrowing:

6,528,000/ (1+x) + 6,332,500/(1+x)^2 + 104,422,500/(1+x)^3 = 107,680,000 <=> x = 3.06%

Thus, Effective cost of this loan is 3.06%.

answer; dogs;

two years ago, when picking flowers in the mountains back of yosemite valley, i found a book. it was blotted and storm-beaten; all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however; many of the inner pages were well preserved. and although all were more or less stained and torn, whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today; its granite pages have been torn and blurred by the same storms that wasted the castaway book.

two years ago, when picking flowers in the mountains back of yosemite valley; i found a book. it was blotted and storm-beaten, all of its outer pages were mealy and crumbly. the paper seemed to dissolve like the snow beneath which it had been buried, however, many of the inner pages were well preserved. and although all were more or less stained and torn; whole chapters were easily readable. this is the condition of the great open book of yosemite glaciers today, its granite pages have been torn and blurred by the same storms that wasted the castaway book.