Question

Dakota Corporation decided to issue three-year bonds denominated in 5 million Russian rubles at par. The bonds have a coupon rate of 17 percent. If the ruble is expected to appreciate from its current level of

Answer 1

Here is the missing part of the question:

$... its \ current \ level \ of \ \ 0.03 \ to \ \ 0.032 \ ,\ 0.034 \, and \ \ 0.035\ in \ years\ 1, \ 2 , \ 3 , \ respectively,$

$\ what \ is \ the financing \ cost \ of \ these \ bonds?$

Answer:

23.39%

Explanation:

From the given information, we learned that the company has raised the amount in rubies, thus there is a need to convert dollars to rubles to be able to pay back the required obligations. Based on the exchange rates, the actual cost of financing would be the IRR of the dollar cash flow that the company will address.

Using the EXCEL FORMULA to compute the actual cost of financing; we have:

    A                    B                    C                    D                          E

Coupon              17%

Year                      0                    1                    2                         3

Cashflow in

rubles            5,000,000   5000000*17%  5000000*17%    5000000+850

                                            = 850000          = 850000         000

                                                                                                  = 5850000

Exchange          $0.30         $0.032                 $0.034              $0.035

rate

(per ruble)

                    5,000,000       5,000,000          5,000,000      5,000,000

Cash flow      × 0.03            × 0.032               × 0.034           × 0.035

in dollars    =  $150000.00  27200.00        28900.00           204750.00

IRR                   23.39%