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Calculate the effective cost of funds to company

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The East Asiatic Company (EAC), a Danish company with subsidiaries all over Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thai baht-denominated (B) debt. The treasuer of EAC-Thailand is considering a one-year bank loan for $250,000. The current spot rate is B32.06/$, and the dollar-based interest is 6.75% for the one year period. One year loans are 12.00% in baht.

Current spot rate, Thai baht/$ 32.06

Expected Thai inflation 4.17%

Expected dollar inflation 1.940%

Loan principal in U.S. dollars $250,000

Thai baht interest rate, 1-year loan 12.000%

US dollar interest rate, 1-year loan 6.750%

Calculate the effective (implied) cost of funds to the company assuming purchase power parity, one year from now? Answer as a percentage with two decimal places.

Reference no: EM132775993

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