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CMA Intermediate · Financial Management and Business Data Analytics · Sources of Finance

Tara Industries raises USD 2,00,000 through an External Commercial Borrowing at 6% p.a. interest. At the start the exchange rate is Rs 80 per USD and at the end of the year it is Rs 84 per USD. Interest is paid at year end at the closing rate and the principal is repaid at year end. What is the effective rupee cost of borrowing for the year, ignoring tax?

The effective rupee cost is 11.30%. Total repayment of USD 2,12,000 at Rs 84 equals Rs 1,78.08 lakh against Rs 160 lakh raised, a rise of 11.3%, combining the 6% interest with the 5% rupee depreciation.

  1. A6.00%
  2. B11.30%Correct
  3. C11.00%
  4. D9.00%

Explanation

Initial rupee receipt = 2,00,000 x 80 = Rs 1,60,00,000. Year-end outflow = 2,12,000 x 84 = Rs 1,78,08,000. Cost = (1,78,08,000 - 1,60,00,000)/1,60,00,000 = 18,08,000/1,60,00,000 = 11.30%. Check: 1.06 x 1.05 = 1.113 gives 11.3%. Option 6% ignores depreciation.

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