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The Copper Mountain Group, a private equity firm headquartered in Boulder, Colorado borrows GBP 5,000,000 for one year at 7.375% interests a. What is the dollar cost of this debt if the pound depreciates from $2.0260/GBP to $ 1.9460/GBP? b. What is the dollar cost of this debt if the pound appreciates from $2.0260/GBP to $ 2.1640/GBP?

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Answer:

Pound depreciates from $2.0260/GBP to $ 1.9460/GBP

Amount borrowed = 5,000,000*2.026 =$10,130,000

Payment after 1 year = 5,000,000*1.07375*1.946 = $10,447,587.5

Dollar cost = (10,447,587.5/10,130,000 - 1)*100 = 3.135%

Pound appreciates from $2.0260/GBP to $ 2.1640/GBP

Amount borrowed = 5,000,000*2.026 =$10,130,000

Payment after 1 year = 5,000,000*1.07375*2.164 = $11,617,975

Dollar cost = (11,617,975/10,130,000 - 1)*100 = 14.688%

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