A U. K.- based drugstore chain, wishes to expand its operations by increasing it

Question

A U. K.- based drugstore chain, wishes to expand its operations by increasing its number of stores by 50. The firm estimates it requires an investment of GBP 30– 40 million to fund this expansion. One possibility was to issue a floating rate note denominated in EUR and paying an interest rate of six- month EURIBOR plus 50 basis points. This note would be issued at par. Assume that this is a two- year note with annual interest payments. Assume that— as with most floating rate instruments— interest payments are determined at the beginning of the period based on the benchmark and contractual formula. Assume the following data: GBPEUR equals 1.40, and six- month EURIBOR equals 1.3 percent. Analysts predict a six- month EURIBOR rate of 1.6 percent at the end of the year. If the amount of the issue is EUR 50 million (issued at par), calculate future EUR- denominated expected cash flows. What is the cost of debt (EUR)? Format x.xx%

Explanation / Answer

Six- month EURIBOR plus 50 basis points, means interest rate plus 0.50 addition with interest rate.

Payout on account of interest would be: a) First Six month's Rate 1.3% +0.50 basic points. 1.80% annual rate, hence for six month period it is 0.90% Cash payment EUR 50 million x 0.90% = EUR 0.450 milion b) econd Six month Rate 1.6% +0.50 basic points. 2.10% annual rate, hence for six month period it is 1.05% Cash payment EUR 50 million x 01.05% = EUR 0.525 milion Cost of debt (EUR) = = Annualised First Six month FR rate 1.80% = [1+(0.018/2)]2 = (1.009)2 = 1.01808 -1 = 0.01808, i.e. 1.808% Seocnd Six month FR rate = 1.60 + 0.50 = 2.10 %   Hence Cost of debts = (1.808 + 2.10)/2 = 3.908/2 = 1.954%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.