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McDougan Associates, a U.S.-based investment partnership, borrows 80,000,000 at a time when the exchange rate is $1.3460/. The entire principal is to be repaid in

McDougan Associates, a U.S.-based investment partnership, borrows 80,000,000 at a time when the exchange rate is $1.3460/. The entire principal is to be repaid in three years, and interest is 6.250% per annum, paid annually in euros. The euro is expected to depreciate vis vis the dollar at 3% per annum. What is the effective $ interest cost of this loan for McDougan?

Assumptions

Principal borrowed for three years, in euros

80,000,000

Interest rate on loan, percent per annum

6.250%

Beginning spot rate, $/euro

1.3460

Expected % change in the euro versus the dollar

-3.000%

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