Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demons

Question

Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.31.3 million, a one-year period, an initial spot rate of SF1.54001.5400/$, a 4.5554.555% cost of debt, and a 4040% tax rate, what is the effective after-tax cost of debt for one year for a U.S. dollar-based company if the exchange rate at the end of the period was: a. SF1.54001.5400/$ b. SF1.50001.5000/$ c. SF1.45701.4570/$ d. SF1.65301.6530/$

Explanation / Answer

Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate of interest than what it expected. Using the same baseline values of a debt principal of SF1.31.3 million, a one-year period, an initial spot rate of SF1.54001.5400/$, a 4.5554.555% cost of debt, and a 4040% tax rate, what is the effective after-tax cost of debt for one year for a U.S. dollar-based company if the exchange rate at the end of the period was: a. SF1.54001.5400/$ b. SF1.50001.5000/$ c. SF1.45701.4570/$ d. SF1.65301.6530/$

Answer :

SF1.54001.5400/$

Foreign Exchange Risk and the Cost of Borrowing Swiss Francs.

Here the same baseline values of a debt principal of SF1.31.3 million

After a one-year period, an initial spot rate of SF1.54001.5400/$.

This value remain as it is after tax deduction.

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