Problem 2

1. The Copper Mountain company in Boulder, Colorado (US) borrows 2,000,000 for one year at 5.25% interest. The current exchange rate is 0.79 per US dollar.

What is the cost (expressed in % terms) of this debt (from the dollar perspective) if the pound depreciated 5%?

What is the cost (expressed in % terms) of this debt (from the dollar perspective) if the pound appreciates 5%?

2. This part of the problem is not related to part a)

The Copper Mountain company is evaluating a purchase of Neft", a small oil company in Russia, and trying to estimate Nefts cost of equity.

The Copper Mountain companys analysts collect the following information:

• risk free rate is 5%,
• sovereign spread (risk premium) for Russia is 7%
• Nefts beta is 1.5
• equity market risk premium is 6.8%

What is Nefts cost of equity?