Corporate Finance – FIN 622 Assignment # 04 Semester Fall 2007

Question

In December 2006 a Multinational Corporation based in Pakistan borrowed

Rs.200 million at an attractive interest rate of 4%, when the exchange rate

between the Pakistani rupee ( PKR) and U.S dollar was Rs. 59.4/$. One year

later when the Corporation came to repay its loan, the exchange rate was Rs.

60.5/$.

Required:

1) Calculate in U.S dollars the amount that The Corporation borrowed and

the amounts that it paid in interest and principal (assume annual interest

payments).

2) What was the effective U.S dollar interest rate on the loan?

Corporate Finance-FIN622 Fall 2007 Assignment # 04

Virtual University

Solution

1) The Corporation borrows Rs.200 million in 2006. It pays Rs.8 million in interest at the

end of 2007, when it also repays the loan.

Cash flows in U.S dollars are as under

Year 2006:

Loan = Rs. 200,000,000/ 59.4 = $ 3,367,003.4

Year 2007:

Interest Payment = Rs. 8,000,000 / 60.5 = $ 132,231.4

Principal Payment = Rs. 200,000,000 / 60.5 = 3,305,785.1

Total Payment = $ 132,231.4 + 3,305,785.1 = $ 3,438,016.5

2) Effective interest rate:

Let re be effective interest rate then

3,367,003.4 × (1+ re) = 3,438,016.5

re = 3,438,016.5 / 3,367,003.4 – 1 = 0.0211 = 2.11%

So effective interest rate is 2.11%

The End