question archive Haier-China can borrow fund in China with an interest rate of 11
Haier-China can borrow fund in China with an interest rate of 11
Subject:AccountingPrice:2.86 Bought8
Haier-China can borrow fund in China with an interest rate of 11.23% to invest 1.62 million Australian dollars (A$) and expected return of A$1.93 million next year. Assume that Haier-China and Biopharma-Australia engages in a parallel loan in which the Biopharma-Australia gives Haier-China A$1.62 million in exchange for a loan in Chinese yuan (CNY) at the current exchange rate CNY3.2255/A$. These loans will be repaid by both parties at the end of one year. Assume that next year, Haier-China will pay Biopharma-Australia 14.37% interest on A$1.62 million and that the Biopharma-Australia will pay Haier-China 7.48% interest on the Chinese yuan loan. Also, Haier-China believes that the A$ will appreciate to CNY3.6698/A$ next year. How much the Haier-China will make a profit or loss in CNY from this parallel loan agreement in one year. (enter the whole number without sign or symbol)
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Solution
At t = 0 Loan amount in CNY, LC = Loan amount x Spot rate
= A$ 1,620,000 x CNY3.2255/A$ = CNY 5,225,310
If Haier-China can borrow this fund in China with an interest rate of 11.23%, the maturity amount to be paid at t = 1 will be
= LC x (1 + ichina) = CNY 5,225,310 x (1 + 11.23%)
= CNY 5,812,112 = C1
The amount that Biopharma-Australia will return to Haier -China = Borrowed amount x (1 + cost of borrowing)
= CNY 5,225,310 x (1 + 7.48%)
= CNY 5,616,163 = C2
Amount that Haier-China will have to return at t = 1 to Biopharma = Borrowed amount x (1 + cost of borrowing)
= A$ 1,620,000 x (1 + 14.37%)
= A$ 1,852,794 = C3
Amount that Haier China will receive from investment
= A$ 1.93 million = A$ 1,930,000 = C4
Exchange rate at t = 1 will be, S = CNY3.6698/A$
Hence, the profit / (loss) of Haier-China in CNY = (C4 - C3) x S + C2 - C1
= (1,930,000 - 1,852,794) x 3.6698 + 5,616,163 - 5,812,112
= CNY 87,381
Hence, 87,381 as the answer.
