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Solution Library
Presentation On Effect Of Capital Structure When Debt Taken From Debt Dominated Currency
Question
Your next meeting is with Toto Matsui, the head of treasury, to discuss the international impact to the firm’s capital structure. He wants you to analyze the implications to the firm’s capital structure if the company took on debt denominated in some currency other than U.S. dollars. In particular, he wants you to develop a PowerPoint presentation of 4–6 slides that covers the following: What risks will the company incur if it increases its long-term debt from $100 million to $150 million by taking on 40 million Euros in debt based on current exchange rates of 0.80 Euros to $1? (The euro debt will pay a 7% coupon.) How would changes in exchange rates between the euro and U.S. dollar impact the firm’s capital structure and interest payments on the Euros? Develop a chart that demonstrates how exchange rates will impact the capital structure of the firm and interest payments on the euro-denominated debt, and explain the chart in the slides that follow. Mr. Matsui tells you to assume the company’s equity will remain at $150 million and will not change when the euro debt is issued. Use Microsoft Excel to graph the capital structure of the firm in U.S. dollars based on changes in exchange rates. Use 2 scenarios: U.S. dollar appreciation against the euro and U.S. dollar depreciation against the euro. For capital structure, graph to total capital structure, debt, and equity.
Summary
The question belongs to Finance and it discusses about preparing a Powerpoint Presentation analyzing the implications to a firm’s capital structure if the company took on debt dominated in a currency other than US dollars, particularly in Euros.
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