Your next meeting is with the head of treasury to discuss the international impact to the firm's capital structure. Toto Matsui, the head of treasury, wants you to analyze what would be 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 analyze the following:
What risks will the company incur if it increases its long-term debt from US$100 million to US$150 million by taking on 40 million in euro debt based on current exchange rates of 0.80 euros to US$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?
Mr. Matsui tells you to assume the company's equity will remain at US$150 million and will not change when the euro debt is issued. He wants you chart (graph) how exchange rates will impact the capital structure of the firm and interest payments on the euro-denominated debt. In addition, he wants you to explain the graphs in a bulleted PowerPoint presentation.
Use Microsoft Excel to graph the capital structure of the firm in U.S. dollars based on changes in exchange rates. Use two 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.
This solution provides a detailed response and the step by step methodology required for the calculations and graphs which accompany this solution. The calculations and graphs are provided in an attached Excel document. An explanation which interprets the calculations and graphs has been constructed in a PowerPoint presentation which accompanies this solution.