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l. Ryan Lock had planned his trip to the Olympic Games in Rio deJa
for expenses while in Rio. But he had postponed exchanging the dollars for Braziliancurrency, real(B
Given the following average monthly exchange rates in2016, when should he have exchanged the d
i. When should he have exchanged the dollars for real to maximize his Brazilian spendingm
A. The best exchange rate was that in March of 2016.
B. The best exchange rate was that in January of 2016.
C. The best exchange rate was that in June of 2016.
D. The best exchange rate was that in August of 2016.
mpic Games in Rio deJaneiro, Brazil, for many months. He had budgeted and saved $15,000
Braziliancurrency, real(BRL orR$), until the very last minute on August8th, doing it in the airport in the United States at BRL 3.1805 e
he have exchanged the dollars for real to maximize his Brazilian spendingmoney?
60829.50 Brazilian Real Proceeds = Ryan Lock budget * Spot Exchange Rate
59476.50
55476.00
53458.50
53124.00
51354.00
49177.50
47707.50
b. What are the Japanese yen proceeds of the U.S. dollar proceeds of thesale? (Round to two decimal pla
ce in Practice 1.2 in thechapter), bought 100 Pokécoins for 17.00
GO, will need to convert the Mexican pesos(Ps orMXN) into its homecurrency, the Japaneseyen,
een the Mexican peso and the U.S. dollar is 18.00 (MXN = 1.00USD),
100.00. What the yen proceeds of CrystalGomez's purchase?
ound to two decimal places.) 94.44 Method 1 Proceeds in JPY = Proceeds in US dollar * Spot Exchange Rate (JPY/USD)
94.44 Method 2
esos (MXN) / Spot Exchange Rate (MXN/USD)
b. How many Guatemalan quetzals will Isaac get for his Brazilianreais 21243.38
GTQ/BRL 4.7208 = 1.00
IsaacDíez has 4,500 Brazilian real (BRL)
ding school inSpain, he meets Juan Carlos Cordero from Guatemala.
y for a couple of weeks.Isaac's parents give him some spendingmoney, 4,500
n quetzals(GTQ). He collects the followingrates:
b. How many Russian rubles will you obtain for youreuros? 949466.09
RUB/EUR 63.298 = 1.00
Your wallet is 15,000 euro (EUR)
o travel fromMunich, Germany, toMoscow, Russia. You leave Munich with 15,000
es(RUB), you obtain the followingquotes:
b. How many Japanese yen will you obtain for your Russianrubles? 1221220.93
RUB/JPY 0.368484 = 1.00
Your wallet is 450,000 euro (EUR)
from your friend in Japan.
et him in Tokyo next week to continue your post-graduation celebratory trip.
eparation for the trip. you want to exchange your Russian rubles for Japanese yen (JPY) so you get the followingquotes:
a. The percentage change in the peso versus the dollar was -40.00%
b. The peso since thattime, and we have now weathered two additionalsix-year dates(2000 and2006), h
ars for having two things every six years (cadaseisaños inSpanish): a presidential election and a currency devaluation.
December20, 1994, the value of the Mexican peso(Ps) was officially changed from Ps 3.30/$ to Ps 5.50/$.
year dates(2000 and2006), has been remarkably stable against all majorcurrencies, including the dollar
Question 7 Kyle's Competing Job Offers. Kyle, after an arduouspost-graduation jobsearch, has received an offe
Each of the three countries - the UnitedKingdom, the CzechRepublic, and France - offers a different
Kyle wants to first compare all of the compensation packages in a commoncurrency, the U.S. dollar.
Use the data at the bottom of this page to determine which offer represents the greatest initial U.S.
j. Which posting has the highest total value as measured in U.S.dollars? (Select the best choicebelow
A. The posting in the United Kingdom has the highest total value as measured in U.S. dollars.
B. The posting in the Czech Republic has the highest total value as measured in U.S. dollars.
C. The posting in France has the highest total value as measured in U.S. dollars.
search, has received an offer of the following three different country posts with a major multinational company.
nd France - offers a different starting salary and a different signingbonus, but in a different currency.
oncurrency, the U.S. dollar.
ents the greatest initial U.S. dollar compensation package.
Currency = $1.00
0.7000
24.35
0.9000
Exchange Rate)
Exchange Rate)
Question 8 Peng Plasma Pricing. Peng Plasma is a privately held Chinese business. It specializes in the manufact
Over the past eight years it has held the Chinese renminbi price of the PT350 cutting torch fixed at R
Over that same period it has worked to reduce costs perunit, but has struggled of late due to higher
Over that same period the renminbi has continued to be revalued against the U.S. dollar by the Chin
After completing the table assuming the same price in renminbi for all yearslong dash answer the fo
a. What has been the impact ofPeng's pricing strategy on theUS$ price? How would you expect the
b. What has been the impact onPeng's margins from this pricing strategy from 2007 to2011?
Fixed Rmb Pricing of the PT350 Plasma Cutting Torch
Cost (Rmb) Margin (RmB)
Year
2007 16000 1400
2008 15400
2009 14800
2010 14700
2011 14200
2012 14400
2013 14600
2014 14800
Cumulative
b. What has been the impact ofPeng's pricing strategy on theUS$ price?
A. By maintaining a constant price inRmb, as the average exchange rate(Rmb/US$) decreased, the
B. By maintaining a constant price inRmb, as the average exchange rate(Rmb/US$) increased, the p
C. By maintaining a constant price inRmb, as the average exchange rate(Rmb/US$) decreased, the p
D. By maintaining a constant price inRmb, as the average exchange rate(Rmb/US$) increased, the p
c. How would you expect their U.S.dollar-based customers to have reacted tothis?
A. As the price inUS$ decreased, the U.S.dollar-based customers would be tempted to look for chea
B. As the price inUS$ increased, the U.S.dollar-based customers would be tempted to look for che
C. As the price inUS$ remainsconstant, the U.S.dollar-based customers would be tempted to look f
D. There is not enough information to answer this question.
d. What has been the impact onPeng's margins from this pricing strategy from 2007 to2011?
A. Peng's margins in Rmb decreased steadily as the average exchange rate(Rmb/US$) increased.
B. Peng's margins in Rmb decreased steadily as the average exchange rate(Rmb/US$) decreased.
C. Peng's margins in Rmb increased steadily as the average exchange rate(Rmb/US$) increased.
D. Peng's margins in Rmb increased steadily as the average exchange rate(Rmb/US$) decreased.
ecializes in the manufacture of plasma cutting torches.
0 cutting torch fixed at Rmb 17,400 per unit.
led of late due to higher input costs.
e U.S. dollar by the Chinese government.
long dash answer the following questions.
Price (Rmb) Margin (%) Average Rate (Rmb/US$) Price (US$) Change US$ Price (%)
Price (Rmb) Margin (%) Average Rate (Rmb/US$) Price (US$) Change US$ Price (%)
17400 8.0% 7.61 2286
17400 11.5% 6.95 2504 9.52%
17400 14.9% 6.83 2548 1.76%
17400 15.5% 6.77 2570 0.89%
17400 18.4% 6.46 2693 4.80%
17400 17.2% 6.31 2758 2.38%
17400 16.1% 6.15 2829 2.60%
17400 14.9% 6.16 2825 -0.16%
23.54%
b. What advice would you give him based on your completion of the tableabove? (Select all the choices th
A. Based onVitro's U.S.sales, in both U.S. dollars and Mexicanpesos, you should recommend that Santi
B. Based onVitro's U.S.sales, in both U.S. dollars and Mexicanpesos, you should recommend that San
C. Under the previous ManagingDirector, U.S. sales measured both ways was volatile. Thevolatility, h
how much volatility he is willing to bear in his annual performance bonus.
D. But moreimportantly, if his performance was based on the USD value of U.S.sales, he would be me
Changes in that exchange rate could potentially destroy all growth in U.S. sales(and hisbonus) as it d
In 2013 U.S. sales grew(not much, but theygrew), and he would have theoretically received a bonus.
and he would not have received a bonus.
the Managing Director position for Vitro deMexico's U.S. operations. Vitro is aMexico-based manufacturer of flat and custom glass produ
arket(e.g., glass bottles for soft drinks andbeer) as well as specialty products(high-end cosmetic bottles with rare metal coloring andqua
id in U.S. dollars. Vitro has agreed that his base salary of USD350,000 will be paid in U.S. dollars,
% above his basesalary) to the Mexican peso value of U.S. sales since Vitro consolidates all final results for reporting to stockholders in M
an peso values of U.S. sales. As a close friend and colleague, what advice would you give him based on your completion of the tablebelow
Change (%)
Change (%) Vitro's U.S. Sales (million of MXN) = Vitro's U.S. Sales (million of USD) * Annual Avg Rate MXN = 1 US
U.S.sales, he would be measured on the actual sales which he had direct control over. Santiago doesnot, and willnot, control the exch
ales(and hisbonus) as it did in 2013.
retically received a bonus. But as measured in Mexican pesos in2013, as a result of a fall in the value of thepeso, his performance wou
at and custom glass products.
re metal coloring andquality).
d willnot, control the exchange rate between the dollar and the peso.
U.S. Parent
Business Performance (000s) (US$)
Earnings before taxes (EBT) 4550
Corporate income tax rate 35%
Average exchange rate for the period
Americo must pay corporate income tax in each country in which it currently has operations.
a. After deducting taxes in eachcountry, what areAmerico's consolidated earnings and consolidated
All MNEs attempt to minimize their global tax liabilities. Answer the following questions regardingA
b. What is the total amount in U.S. dollars that Americo is paying across its global business in corpor
c. What isAmerico's effective tax rate(total taxes paid as a proportion ofpre-tax profit)?
d. What would be the impact onAmerico's EPS and global effective tax rate if Germany instituted a c
a. After deducting taxes in eachcountry, what areAmerico's consolidated earnings and consolidated e
Calculate the business performance per countrybelow: (Round to two decimal places. Round excha
U.S. Parent
Business Performance (000s) Company
Earnings before taxes (local currency) $4,550.00
Less corporate income taxes $1,592.50
Net profits of individual subsidiary $2,957.50
b. What is the total amount in U.S. dollars that Americo is paying across its global business in corporate
U.S. Parent
Company
Corporate income taxes (000s) $1,592.50
Avg exchange rate for the period (fc/$)
Tax payments by country (000s) $1,592.50
d. What would be the impact onAmerico's EPS and global effective tax rate if Germany instituted a cor
Calculate the business performance per countrybelow: (Round to two decimal places. Round excha
German new earning before tax 4940
Corporate tax reduction 28%
U.S. Parent
Business Performance (000s) Company
Earnings before taxes (local currency) $4,550.00
Less corporate income taxes $1,592.50
Net profits of individual subsidiary $2,957.50
Calculate the corporate income taxes from each country in U.S. dollars below
U.S. Parent
Company
Corporate income taxes (000s) $1,592.50
Avg exchange rate for the period (fc/$)
Tax payments by country (000s) $1,592.50
Calculate the earnings before taxes from each country in U.S. dollars below:
U.S. Parent
Company
EBT by country (000s) $4,550.00
Avg exchange rate for the period (fc/$)
EBT by country (000s) $4,550.00
bal effective tax rate if Germany instituted a corporate tax reduction to 28 %, andAmerico's earnings before tax in Germany rose to €4
w: (Round to two decimal places. Round exchange rates to four decimalplaces.)
a. The implied $/£ exchange rate if the U.S. dollar price is $20.76/oz of gold is $/£. (Round to four decima
b. The implied $/£ exchange rate if the U.S. dollar price had been $ 42.96/oz of gold is $/£. (Round to four
.S. dollars was $20.76, while the price of that same ounce in British pounds was £3.857.
U.S. dollar price had been $42.96 per ounce of gold?
$/£. (Round to four decimalplaces.) 5.3824 Implied Exchange Rate = USD / GBP
of gold is $/£. (Round to four decimalplaces.) 11.1382 Implied Exchange Rate = USD / GBP
Question 2 United Kingdom Imports. Toyota manufactures in Japan most of the vehicles it sells in the United Kingd
The spot rate of the Japanese yen against the British pound has recently moved from ¥198/£ to ¥189/£
a. The original import price in British pounds is. (Round to two decimalplaces.)
b. The original import price in British pounds is. (Round to two decimalplaces.)
c. The percentage change in the price of the imported truck is (Round to two decimalplaces.)
o decimalplaces.) 4.76% Percentage Change = (New Import Price / Original Import price) - 1
nge in the import price as expressed in Japanese yen is lower than the percentage change in the value of the Japanese yen against the Briti
nge in the import price as expressed in Japanese yen is higher than the percentage change in the value of the Japanese yen against the Bri
ange in the import price as expressed in Japanese yen is the same percentage change in the value of the Japanese yen against the British
Britishpounds?
b. Was this adepreciation, devaluation,appreciation, orrevaluation? Explain. (Select all the choices thata
A. Anytime a government sets or resets the value of itscurrency, it is a managed or fixed exchange rate.
B. Anytime a government sets or resets the value of itscurrency, it is a managed or fixed exchange rate.
C. Anytime a government sets or resets the value of itscurrency, it is a managed or fixed exchange rate
D. This is evident from the fact that it now takes more pesos per U.S.dollar, so its value is less or deval
nged the value of the Mexican peso from 3.18 pesos per dollar to 5.54 pesos per dollar.
valuation,appreciation, orrevaluation? Explain.
0.9593
a. The spotrate, Saudi Arabian riyal per Jordanian dinar is SRI/JD. (Round to five decimalplaces.)
d. The U.S. dollar equivalent of the final price paid is. (Round to two decimalplaces.)
duty machine tools nearBarcelona, ships an order to a buyer in Jordan. The purchase price is €425,000.
e European Union. The Jordanian importer then re-exports the product to a Saudi Arabianimporter, but only after imposing its own re
e total cost to the Saudi Arabian importer in Saudi Arabianriyal, and what is the U.S. dollar equivalent of thatprice?
d to five decimalplaces.) 5.27567 Exchange Rate = Spot Rate Of Exchnage (SRI/$) / Spot Rate Of Exchange (J
408000.00 Price (JD) = Purchase Price In euro * Spot Rate Of Exchnage (JD/€)
53040.00
461040.00
129091.20
590131.20
3113336.33 Price (SRI) = Spot Rate of Exchange (SRI/JD) * Resale Price to Saudi Arabia
cimalplaces.) $830,001.69 Price ($) = Price Paid in Saudi Arabian Riyal / Spot Rate Of Exchange (SRI/$
ut only after imposing its own resale fee of 28 %.
of thatprice?
a. The balance on goods and services for year 2007 is(in millions) $. (Round to the nearest integer and
b. The balance on goods and services for year 2011 is(in millions) $. (Round to the nearest integer and
c. The balance on goods and services for year 2014 is(in millions) $. (Round to the nearest integer and
data for Australia from theIMF: What isAustralia's balance on goods and services for years 2007, 2011, and 2014?
und to the nearest integer and enter any deficit with a negativesign.) -$17,196 Balance on goods and services
und to the nearest integer and enter any deficit with a negativesign.) $12,237
und to the nearest integer and enter any deficit with a negativesign.) -$8,856
1, and 2014?
a. The balance ongoods, services, and income for year 2005 is(in millions) $. (Round to the nearest intege
b. The balance ongoods, services, and income for year 2008 is(in millions) $. (Round to the nearest intege
c. The balance ongoods, services, and income for year 2011 is(in millions) $. (Round to the nearest intege
India from theIMF: What isIndia's balance ongoods, services, and income for years 2005, 2008, and 2011?
$. (Round to the nearest integer and enter any deficit with a negativesign.) -$33,926 Balance on goods, services, and inc
$. (Round to the nearest integer and enter any deficit with a negativesign.) -$79,725
$. (Round to the nearest integer and enter any deficit with a negativesign.) -$122,731
n goods, services, and income = Balance on goods + Balance of services + Balance of Income
Question 3 China's (Mainland) Balance of Payments. Use the following balance of payments data for China(Mainla
a. The net capital flow in year 2006 was(in millions) $. (Round to the nearest integer and enter any deficit
During year 2006, China experienced a net capital inflow. (Select from thedrop-down menu.)
b. The net capital flow in year 2010 was(in millions) $. (Round to the nearest integer and enter any deficit
During year 2006, China experienced a net capital inflow. (Select from thedrop-down menu.)
c. The net capital flow in year 2014 was(in millions) $. (Round to the nearest integer and enter any deficit
During year 2006, China experienced a net capital outflow. (Select from thedrop-down menu.)
ts data for China(Mainland) from theIMF: Is China experiencing a net capital inflow or outflow in years 2006, 2010, and 2014?
ger and enter any deficit with a negativesign.) $49,305 Net Capital Flow = Capital Account
p-down menu.)
ger and enter any deficit with a negativesign.) $286,864 Inflow Of Capital
p-down menu.)
ger and enter any deficit with a negativesign.) -$51,394 Outflow Of Capital
op-down menu.)
010, and 2014?
a. China's BOP in year 2006 was(in millions) $. (Round to the nearest integer and enter any deficit with a
DoesChina's BOP balance in year 2006? Yes. (Select from thedrop-down menu.)
b. China's BOP in year 2010 was(in millions) $. (Round to the nearest integer and enter any deficit with a
DoesChina's BOP balance in year 2006? Yes. (Select from thedrop-down menu.)
c. China's BOP in year 2014 was(in millions) $. (Round to the nearest integer and enter any deficit with a
DoesChina's BOP balance in year 2006? No. (Select from thedrop-down menu.)
ts data for China(Mainland) from theIMF: DoesChina's BOP balance in years 2006, 2010, and 2014?
enter any deficit with a negativesign.) 0 China BOP = Current account balance + Capital Account Balance + Fin
a. Iceland's total for Groups A through C in year 2009 was(in millions) $. (Round to the nearest integer an
b. Iceland's total for Groups A through C in year 2012 was(in millions) $. (Round to the nearest integer an
c. Iceland's total for Groups A through C in year 2014 was(in millions) $. (Round to the nearest integer an
ata from theIMF: What isIceland's total for Groups A through C in years 2009, 2012 and 2014?
o the nearest integer and enter any deficit with a negativesign.) -21719 Iceland BOP = Current account balance + Capital
o the nearest integer and enter any deficit with a negativesign.) 100
o the nearest integer and enter any deficit with a negativesign.) 3612
nt account balance + Capital Account Balance + Financial Account Balance
Question 6 Trade Deficits andJ-Curve Adjustment Paths. Assume the United States has the followingimport/expor
on average against all major trading partner currencies. What is thepre-devaluation andpost-devaluati
Assumptions Values
Initial spot exchange rate, $/fc 2.14
Price of exports, dollars ($) 18.4900
Price of imports, foreign currency (fc) 12.8000
Quantity of exports, units 100
Quantity of imports, units 120
Percentage devaluation of the dollar 18%
b. The expenditures on imports in foreign currency are fc. (Round to two decimalplaces.)
c. The expenditures on imports in U.S. dollars are $. (Round to the nearestcent.)
d. Calculate thepre-devaluation trade balancebelow: (Round U.S. dollar values to the nearest cent and ro
Pre-devaluation trade balance
Revenues from exports, U.S. dollars $
Expenditures on imports, foreign currency fc
Expenditures on imports, U.S. dollars $
Pre-devaluation trade balance $
e. The new spot exchange rate after devaluation is $/fc. (Round to four decimalplaces.)
f. The new expenditures on imports in U.S. dollars are $. (Round to the nearestcent.)
g. Calculate thepre-devaluation trade balancebelow: (Round U.S. dollar values to the nearest cent and ro
Pre-devaluation trade balance
Revenues from exports, U.S. dollars $
Expenditures on imports, foreign currency fc
Expenditures on imports, U.S. dollars $
Pre-devaluation trade balance $
the followingimport/export volumes and prices. It undertakes a major"devaluation" of thedollar, say 18%
aluation andpost-devaluation tradebalance?
$1,849 Revenue From Export = Price Of Exports ($) * Quantity Of Exports (Units)
1536.00 Expenditures On Imports (fc) = Price Of Import (fc) * Quantity Of Import (Units)
$3,287.04 Expenditures On Imports ($) = Expenditures On Imports (fc) * Spot Exchange Rate ($/fc)
$1,849.00
1536.00
$3,287.04
-$1,438.04
$4,008.59
$1,849.00
1536.00
$4,008.59
-$2,159.59
Of Import (Units)
a. If Spencer sells his sharestoday, what percentage change in the share price would hereceive?
The shareholder return is %. (Round to two decimalplaces.)
b. What is the percentage change in the value of the euro versus the dollar over this sameperiod?
The percentage change in the value of the euro versus the dollar is. (Round to two decimalplaces.)
c. What would be the total return Spencer would earn on his shares if he sold them at theserates?
If he sold his sharestoday, it would yield the following amount in euros euro. (Round to two decimalpl
e. The original investment(cost) of 400 shares in Vaniteux in euros is. (Round to two decimalplaces.)
f. The original investment(cost) of shares in U.S.dollars, calculated at the original spot rate is $. (Round to
g. The rate of return onSpencer's investment, net proceeds divided by initial investment is %. (Round to t
He has been closely following his investment in 400 shares ofVaniteux, a French firm that went public in February 2010.
$1.3671/€. Currently, the share is trading at €28.31 pershare, and the dollar has fallen to $ 1.4124/€.
uld hereceive?
59.40% Shareholder Return = (P2 - P1) / (P1)
his sameperiod?
wo decimalplaces.) 3.31% Exchange Rate Change = (End - Begin) / (Begin)
m at theserates?
Round to two decimalplaces.) 11324.00 Sale Proceeds (€) = Price Per Shares * Number Of Shares
wo decimalplaces.) 7104.00 Original Cost in Euros (€) = Original Price Per Shares (€) *
l spot rate is $. (Round to the nearestcent.) 9711.88 Original Cost in U.S. ($) = Original Cost in Euros (€) * Orig
stment is %. (Round to two decimalplaces.) 64.69% Shareholder Return = (Sale Proceeds ($) - Original Cost)
64.69% Shareholder Return = (1 + Change in Share Price) * (1 + C
Begin) / (Begin)
Assumptions Values
Share price, P1 62.00
Share price, P2 71.00
Dividend paid, D2 1.84
Rate Of Return 12%
b. A. Theshare's expected return of 19.58% far exceeds Mr.Carty's required return of 12%. He should ther
B. Theshare's expected return of 17.48% far exceeds Mr.Carty's required return of 12%. He should th
C. Theshare's expected return of 19.58% far exceeds Mr.Carty's required return of 12%. He should ther
D. Theshare's expected return of 17.48% far exceeds Mr.Carty's required return of 12%. He should ther
t alternatives. If he believes an individual equity will rise in price from $62 to $71 in the coming one-year period,
ects at least a 12% rate of return on an investment of thistype, should he invest in this particularequity?
a. Calculate the necessary variables for the analysisbelow: (Round to the nearestinteger.)
Analysis of Japanese yen-Denominated Debt 2010 2011 2012
Annual yen payments on debt agreement (¥) 11,700,000 11,700,000 11,700,000
Average exchange rate, ¥/HK$ 12.77 11.76 11.02
Annual yen debt service, HK$ 916210 994898 1061706
estinteger.)
Annual yen debt service, HK$ = Annual yen payments on debt agreement (¥) / Average exchange rate, ¥
g-term loan indicates that for the past two years the effective cost of repaying the loan, in Hong Kongdollars, has been steadily
en. Infact, the Japanese yen debt has not proven to be as cheap as thought.
(¥) / Average exchange rate, ¥/HK$
b. What were the percentage change insales, byregion, net of currency changeimpacts?
Calculate the percentage change insales, byregion, net of currency change impactsbelow: (Round to o
Net Percentage Change in Sales 2001-2002
Europe 13.1%
Latin America 7.2%
Canada 8.6%
Asia Pacific 6.4%
c. What impact did currency changes have on the level and growth of consolidated sales between 2001 an
2003 2004
Sales (000) Sales (000)
$1,359,591 $1,400,986
462603 532789
175922 189781
180157 201910
$2,178,273 $2,325,466
3206236 3206241
-420,205 -450,381
$4,964,304 $5,081,326
2002-2003 2003-2004
14.80% 7.90%
-5.80% -2.10%
10.80% 4.80%
13.10% 5.90%
hangeimpacts?
ange impactsbelow: (Round to one decimalplace.)
2002-2003 2003-2004
6.7% -4.9% Net Percentage Change = Percentage Change - Impact Of Change In Currency Rat
3.6% 17.3%
-3.7% 3.1%
17.4% 6.2%
a. Which period shown had the highest totalreturns? Thelowest? (Select the best choicebelow.)
A. The period with the highest total returns is the1990s, while the period with the lowest total returns i
B. The period with the highest total returns is the1950s, while the period with the lowest total returns i
C. The period with the highest total returns is the1950s, while the period with the lowest total return
D. The period with the highest total returns is the1990s, while the period with the lowest total returns i
b. Which decade had the highest dividendreturns? When were dividends clearly not a priority for publicly
A. The decade with the highest dividend returns is the1940s, while the period when dividends were cle
B. The decade with the highest dividend returns is the1930s, while the period when dividends were clea
C. The decade with the highest dividend returns is the1930s, while the period when dividends were clea
D. The decade with the highest dividend returns is the1940s, while the period when dividends were c
c. The 1990s was a boom period for U.S. equity returns. How did firms react in terms of their dividenddist
Dividend returns during the 1990s were the second lowest in history.
d. How has the 2000s periodfared? How do you think publicly traded companies have started changing th
The 2000s period was the worst in history. Publicly traded companies have increased their dividend yiel
nt returns over the past 90 years.
bout these U.S. equity investment returns.
t choicebelow.)
he lowest total returns is the 1930s.
he lowest total returns is the 1930s.
the lowest total returns is the 2000s.
he lowest total returns is the 2000s.
have started changing their dividend distribution habits as a result? (Select from thedrop-down menus.)
eased their dividend yields since then.
Question 1 Victoria Exports(Canada). A Canadianexporter, VictoriaExports, will be receiving six payments of €
Since the company keeps cash balances in both Canadian dollars and U.S.dollars, it can choose whic
Which currency appears to offer the better rates in the forwardmarket?
a. Calculate the forwardpremium, the Canadian dollarproceeds, and the difference from the spot rate
(Round the forward premium to three decimal places and the Canadian dollar amounts to the nea
Period Days ForwardC$/euro Forward Premium
On the c$/Euro
Spot 0 1.3356 C$
1 month 30 1.3379 2.066% C$
2 months 60 1.3400 1.977% C$
3 months 90 1.3425 2.066% C$
6 months 180 1.3446 1.348% C$
12 months 360 1.3471 0.861% C$
b. Calculate the forwardpremium, the U.S. dollarproceeds, and the difference from the spot rate proc
(Round the forward premium to three decimal places and the U.S. dollar amounts to the nearestcen
Period Days ForwardUS$/euro Forward Premium
On the US$/Euro
Spot 0 1.3244 C$
1 month 30 1.3248 0.362% C$
2 months 60 1.3250 0.272% C$
3 months 90 1.3255 0.332% C$
6 months 180 1.3258 0.211% C$
12 months 360 1.3287 0.325% C$
c. Which currency appears to offer the better rates in the forwardmarket? (Select from thedrop-dow
The Canadian exporter will be receiving six payments of 13600 euros, ranging from now to 12 month
Since the company keeps cash balances in both Canadian dollars and U.S.dollars, it can choose whic
And since the company wishes to lock in the forward rate for each and everypayment, it would app
Since the euro is selling forward at a greater premium against the Canadian dollar than the U.S. doll
will be receiving six payments of €13,600, ranging from now to 12 months in the future.
and U.S.dollars, it can choose which currency to exchange the euros for at the end of the various periods.
d the difference from the spot rate proceeds in theC$/Euro forward marketbelow:
nadian dollar amounts to the nearestcent.)
C$ Proceeds of Difference
€ 13,600 Over Spot
18164.16 C$ 0.00 Proceeds = Payment * Exchange Rate (C$/euro)
18195.44 C$ 31.28
18224.00 C$ 59.84
18258.00 C$ 93.84 Forward Premium = (Forward Rate - Spot Rate)/(Spot Rate) * (360/Days)
18286.56 C$ 122.40
18320.56 C$ 156.40 Difference = Forward Proceeds - Spot Proceeds
b. What is the annual forward premium on the yen for allmaturities? (Assume that the U.S. dollar is the h
Calculate the annual forward premium for all maturitiesbelow: (Round to three decimalplaces.)
Period Days Forward Bid Rate Ask Rate Forward
¥/$ ¥/$ Premium
spot 0 81.01 81.05
1 month 30 80.64 80.68 5.505%
2 months 60 80.49 80.53 3.875%
3 months 90 80.06 80.09 4.771%
6 months 180 78.85 78.88 5.490%
12 months 360 78.51 78.55 3.183%
24 months 720 77.46 77.51 2.288%
Initial SF 12100000
arestcent.)
two decimalplaces.)
Assumptions Values
Export Price in ¥ 2150000
Initial Spot Rate ¥ 87.64 Per US dollar
U.S. Inflation 2.1%
Japan Inflation 0.0%
Desire Rate Of Pass-Through By Toyota 75%
a. What was the export price for the Corolla at the beginning of the year expressed in U.S.dollars?
The export price for the Corolla at the beginning of the year expressed in U.S. dollars is. (Round to th
b. Assuming purchasing power parityholds, what should be the exchange rate at the end of theyear?
Assuming purchasing power parityholds, the exchange rate be at the end of the year should be yen/
c. Assuming100% exchange ratepass-through, what will be the dollar price of a Corolla at the end of t
Assuming100% exchange ratepass-through, the dollar price of a Corolla at the end of the year will b
d. Assuming75% exchange ratepass-through, what will be the dollar price of a Corolla at the end of th
STEP 1 First, calculate the expected exchange rate change (Round to one decimalplaces.)
STEP 2 Next, calculate the proportional percentage change. (Round to two decimalplaces.)
STEP 3 Then, calculate the effective exchange rate used. (Round to three decimalplaces.)
Assuming75% exchange ratepass-through, the dollar price of a Corolla at the end of the year will be
Now calculate the dollar price of a Corolla at the end of theyear, assuming75% exchange ratepass-
ta Corolla fromOsaka, Japan, is ¥2,150,000. The exchange rate is ¥87.64/$. The forecast rate of inflation in the United States is 2.1%
er the following questions on exchange ratepass-through.
Per US dollar
ne decimalplaces.) 2.1%
ee decimalplaces.) 86.281
a Corolla at the end of the year will be $. (Round to the nearestcent.) 24918.56
r, assuming75% exchange ratepass-through
n in the United States is 2.1%
Expected Spot Rate = (Initial Spot Rate) * (1 + Japan Inflation) / (1 + U.S. Inflation)
Price In $ With 100% Pass-Through = (Export Price in ¥ ) * (1 + Japan Inflation) / (Expected Spot Rate)
Expected Exchange Rate Change = (Initial Spot Rate - Expected Spot Rate) / Expected Spot Rate) * 100%
Proportional Percentage Change = Expected Exchange Rate Change * Proportion Of Exchange Rate Pass-Through
Effective Exchange Rate Used = (Initial Spot Rate) / (1 + Proportional Percentage Change)
Price In $ With 75% Pass-Through = (Export Price in ¥ ) / (Effective Exchange Rate Used)
ate Pass-Through
Question 2 Kamada: CIA Japan(A). TakeshiKamada, a foreign exchange trader at Credit Suisse(Tokyo), is exploring
or its yenequivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced th
Assumptions Values
Arbitrage funds available 5000000
Spot rate (¥/$) 118.57
180-day forward rate (¥/$) 117.87
U.S. dollar annual interest rate 4.803%
Japanese yen annual interest rate 3.397%
a. Finally, The CIA profit potential is (Round to three decimal places and select from thedrop-down menu
The CIA profit potential is negative -0.218%, which tells Takeshi Kamada
that he should borrow the Japanese yen and invest in the higher yieldingcurrency,
theU.S.dollar, to lock in a covered interest arbitrage(CIA) profit.
STEP 1 First, calculate the difference in the interest rates. (Round to three decimalplaces.)
STEP 2 Next, calculate the forward premium on the yen. (Round to three decimalplaces.)
STEP 1 First, calculate the proceeds of the investment at the U.S. dollar interest rate for 180-Days
STEP 3 Next, convert the original investment amount from U.S. dollars to Japanese yen
STEP 4 Then, calculate the proceeds at the Japanese yen interest rate for 180-Days
dit Suisse(Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000
nd Japanese yen. He faced the following exchange rate and interest rate quotes. Is CIA profit possible? Ifso, how?
ct from thedrop-down menus.) -0.218% CIA = Difference In Interest Rate + Forward Premium On The Yen
-1.406% Difference In Interest Rates = Japanese Yen Annual Interest Rate - U.S. Dollar
1.188% Forward Premium on The Yen = (Spot Rate - Forward Rate) / (Forward Rate) *
583683.00 CIA Profit = Japanese Yen From U.S. Dollar Investment - Japanese Yen in 180-D
e higher interest rate
rd into yen at a
te for 180-Days 5120075.00 U.S. Dollar in 180-Days = Arbitrage Funds Available * (1 + U.S. Dollar Interest R
603503240.25 Japanese Yen From U.S. Dollar Investment = U.S. Dollar in 180-Days * 180-Da
602919557.25 Japanese Yen in 180-Days = Japanese Yen * (1 + Japanese Yen Interest Rate 18
On The Yen
Assumptions Values
Arbitrage funds available 1050000
Spot rate (SFr/$) 1.2814
3-Month forward rate (SFr/$) 1.2736
U.S. dollar annual interest rate 4.804%
Swiss Franc annual interest rate 3.199%
a. Finally, The CIA profit potential is (Round to three decimal places and select from thedrop-down menu
The CIA profit potential is 0.845%, which tells Casper Landsten
he should borrow U.S. dollars and invest in the lower yieldingcurrency,
the Swissfranc, in order to earn covered interest arbitrage(CIA) profits.
STEP 1 First, calculate the difference in the interest rates. (Round to three decimalplaces.)
STEP 2 Next, calculate the forward premium on the yen. (Round to three decimalplaces.)
STEP 2 Next, calculate the proceeds of the Swiss francs amount after 90 days
STEP 4 Then, calculate the proceeds of the original investment amount in U.S. dollars after 90-Days
a bank in New York. He has $1.05 million(or its Swiss francequivalent) for a short term
or threemonths, or make a CIA investment in the Swiss franc. He faces the followingquotes:
ct from thedrop-down menus.) 0.845% CIA = Difference In Interest Rate + Forward Premium On The SFr
-1.605% Difference In Interest Rates = Swiss Franc Annual Interest Rate - U.S. Dollar A
2.450% Forward Premium on The Swiss Franc = (Spot Rate - Forward Rate) / (Forwa
2268.89 CIA Profit = U.S. Dollar From U.S. Dollar Investment - U.S. Dollar At U.S. Dolla
1356230.40 Swiss Franc in 90-Days = Swiss Franc * (1 + Swiss Franc Interest Rate 90)
1064879.39 U.S. Dollar From U.S. Dollar Investment = Swiss Franc in 90-Days / 90-Days F
lars after 90-Days 1062610.50 U.S. Dollar in 90-Days = Arbitrage Funds Available * (1 + U.S. Dollar Interest R
erest Rate - U.S. Dollar Annual Interest Rate
Assumptions Values
Arbitrage funds available 900000
Spot rate (SFr/$) 1.3397
3-Month forward rate (SFr/$) 1.3288
U.S. dollar annual interest rate 4.752%
Swiss Franc annual interest rate 3.625%
a. Finally, The CIA profit potential is (Round to three decimal places and select from thedrop-down menu
This tells Casper Landsten he should borrow U.S. dollars and invest in
the lower yieldingcurrency, the Swissfranc, and then sell the Swiss franc
principal and interest forward three months locking in a CIA profit.
STEP 1 First, calculate the difference in the interest rates. (Round to three decimalplaces.)
STEP 2 Next, calculate the forward premium on the yen. (Round to three decimalplaces.)
STEP 2 Next, calculate the proceeds of the Swiss francs amount after 90 days
STEP 4 Then, calculate the proceeds of the original investment amount in U.S. dollars after 90-Days
c. Should he enter into a covered interest arbitrage(CIA) investment? (Select the best choicebelow.)
A. No, Casper should not undertake the covered interest arbitragetransaction, as it would yield a risky p
B. Yes, Casper should undertake the covered interest arbitragetransaction, as it would yield a riskless pr
C. Yes, Casper should undertake the covered interest arbitragetransaction, as it would yield a riskless pr
D. No, Casper should not undertake the covered interest arbitragetransaction, as it would yield a risky p
million(or its Swiss francequivalent) to invest for three months.
arbitrage(CIA) investment?
ct from thedrop-down menus.) 2.154% CIA = Difference In Interest Rate + Forward Premium On The SFr
-1.127% Difference In Interest Rates = Swiss Franc Annual Interest Rate - U.S. Dollar Ann
3.281% Forward Premium on The Swiss Franc = (Spot Rate - Forward Rate) / (Forward
4913.76 CIA Profit = U.S. Dollar From U.S. Dollar Investment - U.S. Dollar At U.S. Dollar I
1216656.93 Swiss Franc in 90-Days = Swiss Franc * (1 + Swiss Franc Interest Rate 90)
915605.76 U.S. Dollar From U.S. Dollar Investment = Swiss Franc in 90-Days / 90-Days For
lars after 90-Days 910692.00 U.S. Dollar in 90-Days = Arbitrage Funds Available * (1 + U.S. Dollar Interest Rat
risk still exists if one of his counterparties failed to actually make good on their contractual commitments to deliver the forward or pay the
risk still exists if one of his counterparties failed to actually make good on their contractual commitments to deliver the forward or pay the
risk still exists if one of his counterparties failed to actually make good on their contractual commitments to deliver the forward or pay the
risk still exists if one of his counterparties failed to actually make good on their contractual commitments to deliver the forward or pay the
deliver the forward or pay the interest) of $900,000 on each $4,913.76 invested.
deliver the forward or pay the interest) of $900,000 on each $4,913.76 invested.
deliver the forward or pay the interest) of $4,913.76 on each $0.9 million invested.
deliver the forward or pay the interest) of $4,913.76 on each $0.9 million invested.
Question 5 Trans-Atlantic Quotes. Separated by more than3,000 nautical miles and five timezones, money and for
The following information has been collected from the respectiveareas:
b. Estimatetoday's 1-year forward exchange rate between the dollar and the euro.
The estimate fortoday's 1-year forward exchange rate between the dollar and the euro is $/euro. (Roun
ve timezones, money and foreign exchange markets in both London and New York are very efficient.
Round to three decimalplaces.) 0.668% Expected Rate Of Inflation In Europe = (1 + London Nominal
3.21% New York Real Rate Of Interest = (1 + One-Year T-Bill Rate New
and the euro is $/euro. (Round to four decimalplaces.) 1.3340 One Year Forward Exchange Rate = Spot Exchange Rate * (1
urope = (1 + London Nominal Rate) / (1 + New York Real Rate) - 1
= (1 + One-Year T-Bill Rate New York) / (1 + Expected Inflation Rate New York) - 1
ate = Spot Exchange Rate * (1 + One-Year T-Bill Rate New York) / (1 + One-Year T-Bill Rate London)
Question 6 East Asiatic-Thailand. The East Asiatic Company(EAC), a Danish company with subsidiaries throughoutA
primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thaiba
is considering a1-year bank loan for $252,000. The current spot rate is B32.02/$, and thedollar-based in
Assumptions Values
Current spot rate, Thai baht/$ 32.02
Expected Thai inflation 4.4% Located in Question a.
Expected dollar inflation 1.28% Located in Question a.
Loan principal in U.S. dollars 252000
Thai baht interest rate, 1-year loan 12.02%
U.S. dollar interest rate, 1-year loan 6.79%
a. Assuming expected inflation rates for the coming year of 4.4% and 1.28% in Thailand and the UnitedSta
according to purchase powerparity, what would be the effective cost of funds in Thai bahtterms?
STEP 1 First, calculate the value of the U.S.dollar loan amount in one year
b. IfEAC's foreign exchange advisers believe strongly that the Thai government wants to push the value of
over the coming year(to promote its export competitiveness in dollarmarkets), what might be the effec
Assuming a future spot rate for the baht is 5% weaker than the current spotrate, the implied cost is. (Ro
STEP 1 First, calculate the value of the U.S.dollar loan amount in one year
c. If EAC could borrow Thai baht at 13.00% perannum, would this be cheaper than either part a or part b?
A. Part a and part b both have a higher rate than 13.00%. Also, both are highly risky given that the futur
B. Part a and part b are both cheaper than borrowing at 13.00%. However, both are highly risky given th
C. Part a is cheaper than borrowing at 13.00%. However, part a is highly risky given that the future spot
D. Part b is cheaper than borrowing at 13.00%. However, part b is highly risky given that the future spot
ith subsidiaries throughoutAsia, has been funding its Bangkok subsidiary
capital as opposed to Thaibaht-denominated (B) debt. The treasurer ofEAC-Thailand
02/$, and thedollar-based interest is 6.79% for the1-year period.1-year loans are 12.02% in baht.
n Question a.
n Question a.
Thailand and the UnitedStates, respectively, 10.080% Effective Cost Of Funds In Thai Baht = (Baht Ne
nds in Thai bahtterms?
t wants to push the value of the baht down against the dollar by 5 % 12.411%
ets), what might be the effective cost of funds in bahtterms?
trate, the implied cost is. (Round to three decimalplaces.)
ear = U.S. Dollar Loan Amount * (1 + U.S. dollar Interest Rate 1 Year)
ear = U.S. Dollar Loan Amount * (1 + U.S. dollar Interest Rate 1 Year)
Assumptions Values
Principal investment, British pounds 1125000.00
Spot exchange rate ($/£) 1.5815
180-day forward rate ($/£) 1.5559
Malaysian ringgit 180-day yield 8.898%
Spot exchange rate, Malaysian ringgit/$ 3.13488
a. The investment proceeds from the initial investment is. (Round to two decimalplaces.)
c. (Round the percentage to three decimal places and select from thedrop-down menus.)
If Clayton Moore invests in the Malaysian ringgitdeposit, and accepts the uncovered risk associated wit
exchange rate(managed by thegovernment), and sells the dollar proceedsforward, he should expect a
on his180-day pound investment. This is better than the 4.203% per annum he can earn in theeuro-po
STEP 1 First, convert the initial investment from British pounds to U.S. dollars
STEP 4 Next, calculate the Malaysian ringgit proceeds after 180 days
1194384.955 British Pounds Proceeds = U.S. Dollar Proceeds / 180-Day Forward Rate
6.168% Return = ((British Pounds Proceeds / Initial Investment In British Pounds) - 1) * 100%
wn menus.)
covered risk associated with theRM/$
orward, he should expect a return of 6.168%
he can earn in theeuro-pound market.
1779187.50 Initial Investment In U.S. Dollars = Initial Investment in British Pounds * Spot Exchange
5577539.31 Initial Investment In Malaysian Ringgits = Initial Investment In U.S. Dollars * Spot Exch
1.0445 Malaysian Ringgit Deposit Rate 180-Days = (1 + (Malasian Ringgit 180-Day Yield * 180/360
5825684.034 Malaysian Ringgit Proceeds = Initial Investment In Malaysian Ringgit * Malaysian Ringg
1858343.552 U.S. Dollar Proceeds =Malaysian Ringgit Proceeds / Spot Exchange Rate (Ringgit/$)
ors a near risk-free investment with variable
ed. Clayton is currently evaluating a rather
e of the Malaysian ringgit. The ringgit
ay is RM 3.13488/$. Local currency time
spot rate on the British pound is $1.5815/£, and
a. The percentage change in the value of the loonie for the period of January 1980 to January 1986 is. (Rou
1980 to January 1986 is. (Round to two decimal places. A negative change must be entered with a negativesign.)
Spot Exchange Rate Feb 20th 2001 (TL/USD) TL 67000 1.00 USD
Spot Exchange Rate Feb 24th 2001 (TL/USD) TL 95000 1.00 USD
b. What was the percentage change after falling to TL95,000/$ on February24, three days after thedevalu
The percentage change from the initial value after falling to TL95,000/$ is. (Round to two decimal place
The percentage change from the"devalued" value after falling to TL95,000/$ is. (Round to two decimal
ernment in February 2001 during a severe political and economic crisis.
valued by 20%. The spot exchange rate on February 20th was TL 67,000/$.
83750 Spot Rate Feb 21th = (Spot Rate Feb 20th) / (1 - Devaluation Percentage)
ree days after thedevaluation? -29.47% Percentage Change = (Beginning Rate -Ending Rate) / (Ending Rate) *100
und to two decimal places. A negative change must be entered with a negativesign.)
. (Round to two decimal places. A negative change must be entered with a negativesign.)
-11.84% Percentage Devalued = (Spot Rate Feb 21th - Spot Rate Feb 24th) / (Spot Rate F
evaluation Percentage)
Opening Spot Exchange Rate, July 2, 1997 (TL/USD) THB 24.84 1.00
Closing Spot Exchange Rate, July 2, 1997 (TL/USD) THB 29.15 1.00
USD
USD
-14.79%
Question 5 Mikhail's Dilemma. Mikhail Khodorkovsky was one of the infamous Russianoligarchs, accumulating billi
But in 2003 he had been imprisoned by the Russian state for a decade. Upon his release from prison in 2
Mikhail held a portfolio of USD204 million and CHF150 million in Swissbanks, in addition to accounts in
December 4, 2014 December 16, 2014 December 24, 2014 January 16, 2015
56.249 70.281 55.361 76.644
54.412 67.511 54.617 65.074
1.0338 1.041 1.0136 1.1778
December 4, 2014 December 16, 2014 December 24, 2014 January 16, 2015
1,600,000,000 1,600,000,000 1,600,000,000 1,600,000,000 Equals the original account
8437350000 10542150000 8304150000 11496600000 U.S. Dollar Account Balanc
11100048000 13772244000 11141868000 13275096000 Swiss Franc Account Balan
21,137,398,000 25,914,394,000 21,046,018,000 26,371,696,000 Portfolio Total Rubles = Russia
December 4, 2014 December 16, 2014 December 24, 2014 January 16, 2015
28,444,950 22,765,755 28,901,212 20,875,737 Russian Ruble Account Bal
150,000,000 150,000,000 150,000,000 150,000,000 Equals the original account
197330238 195965418 201262826 173204279 U.S. Dollar Account Balanc
375,775,188 368,731,172 380,164,038 344,080,016 Portfolio Total Swiss Francs = Ru
December 4, 2014 December 16, 2014 December 24, 2014 January 16, 2015
29,405,278 23,699,842 29,294,908 24,587,393 Russian Ruble Account Bal
155070000 156150000 152040000 176670000 Swiss Franc Account Balan
204,000,000 204,000,000 204,000,000 204,000,000 Equals the original account
388,475,278 383,849,842 385,334,908 405,257,393 Portfolio Total USD = Russian
r the six dates is U.S. dollar.
r the six dates is the Russian ruble.
r the six dates is the Swiss franc.
Equals the original account holding in Russia
U.S. Dollar Account Balance Rubles =U.S. Dollar Account Balance * Russian Ruble Per Swiss Franc Exchange Rate
Swiss Franc Account Balance Rubles = Swiss Franc Account Balance * Russian Ruble Per Swiss Franc Exchange Rate
Portfolio Total Rubles = Russian Ruble Account Balance + Swiss Franc Account Balance Rubles + U.S. Account Balance Rubles
Russian Ruble Account Balance Swiss Francs = (Russian Ruble Account Balance) / (Russian Ruble Per Swiss Franc Exchange Rate)
Equals the original account holding in Swiss Franc
U.S. Dollar Account Balance Swiss Francs = (U.S.Dollar Account Balance) / (U.S. Dollar Per Swiss Franc Exchange Rate)
Portfolio Total Swiss Francs = Russian Ruble Account Balance Swiss Francs + Swiss Franc Account Balance + U.S. Account Balance Swiss Francs
Russian Ruble Account Balance USD = (Russian Ruble Account Balance) / (Russian Rubles Per U.S. Dollar Exchange Rate)
Swiss Franc Account Balance USD = Swiss Franc Account Balance * U.S. Dollar Per Swiss Franc Exchange Rate
Equals the original account holding in U.S. Dollar
Portfolio Total USD = Russian Ruble Account USD + Swiss Franc Account Balance USD + U.S. Account Balance
Exchange Rate)
hange Rate)
Question 6 BP and Rosneft 2015. BP(UK) and Rosneft(Russia) had severed along-term joint venture in2013, with
Rosneft financed a large part of the buyout by borrowing heavily. The followingyear, in July2014, BP re
had beendeclining, as was the Russian ruble. The winter of2014-2015 in Europe was a relatively mildo
total sales weredown, and the ruble had clearly fallen dramatically. And to add debt toinjury, Rosneft w
a. Assuming a spot rate of RUB 34.90 equals USD 1.00 in July2014, how much was the dividend paid to BP
The dividend paid to BP is. (Round to the nearestcent.)
b. If Rosneft were to pay the same dividend to BP in July2015, and the spot rate at that time was
RUB 75.25 equals USD 1.00, what would BP receive in U.S.dollars?
c. If the combination of Western sanctions against Russia and lower global oil prices truly sent the Russian
and the spot rate was RUB 75.25 equals USD 1.00 in July2015, what mightBP's dividend be in July2015
P's dividend could very well be zero in 2015 if the Russian economy worsened in the first half of theye
B
and the fall of the ruble. Even if Rosneft did manage to achieve a positive level of profit in2015, given it
a dividend in order to preserve cash flow for debt service. Finally, at least in the early spring of2015, the
capital controls that would prevent the payment of the dividend to a foreign stockholder like BP. Capita
term joint venture in2013, with Rosneft buying BP out with $55 billion in cash and a20% interest(equity interest) in Rosneft itself.
ollowingyear, in July2014, BP received a dividend on its ownership interest in Rosneft of RUB23 billion. ButRosneft's performance
n Europe was a relatively mildone, andEurope's purchases ofRosneft's natural gas had fallen as had the price of natural gas.Rosneft's
d to add debt toinjury, Rosneft was due to make a payment of USD19.3 billion in 2015 on its debt from the BP buyout.
USD
USD
uch was the dividend paid to BP in U.S.dollars? 661489790.05 Dividend USD = (Dividend to BP in Rus
orsened in the first half of theyear, andRosneft's profitability was destroyed from economicconditions, sanctions,
ve level of profit in2015, given its sizeable debt paymentobligation, it could choose to not pay
st in the early spring of2015, there was a real possibility that the Russian government could institute
reign stockholder like BP. Capital controls were a real possibility because of the plummeting value of the ruble.
t) in Rosneft itself.
eft's performance
natural gas.Rosneft's
D
= (Dividend to BP in Russian Rubles) / (Spot Rate)
Question 7 Purchasing Power Parity Forecasts. Use the table containingeconomic, financial, and business indicato
Assuming purchasing powerparity, and assuming that the forecasted change in consumer prices is a goo
n/$. (Round to two decimalplaces.) 112.73 Spot Rate Forecast = (Current Japanese Yen Spot)/(Current U.S. Dollar S
is yen/A$. (Round to two decimalplaces.) 99.86 Spot Rate Forecast = (Current Japanese Yen Spot)/(Current Australia Do
Round to two decimalplaces.) 1.1289 Spot Rate Forecast = (Current Australia Spot)/(Current U.S. Dollar Spot)
en Spot)/(Current U.S. Dollar Spot) * (1 + Japanese Inflation)/(1 + U.S. Inflation)
en/$. (Round to two decimalplaces.) 111.80 Future Spot Exchange Rate = (Current Japanese Yen Spot)/(C
115.00
1.00
1.68%
4.59%
is yen/A$. (Round to two decimalplaces.) 97.47 Future Spot Exchange Rate = (Current Japanese Yen Spot)/(C
115.00
1.13
1.68%
6.17%
Round to four decimalplaces.) 1.1471 Future Spot Exchange Rate = (Current Australia Spot)/(Curren
1.13
1.00
6.17%
4.59%
Current Japanese Yen Spot)/(Current U.S. Dollar Spot) * (1 + Japanese Interest Rate On 1-yr Govt Bond)/(1 + U.S. Interest Rate On 1-yr Gov
Current Japanese Yen Spot)/(Current Australia Dollar Spot) * (1 + Japanese Interest Rate On 1-yr Govt Bond)/(1 + Australia Interest Rate On
Current Australia Spot)/(Current U.S. Dollar Spot) * (1 + Australia Interest Rate On 1-yr Govt Bond)/(1 + U.S. Interest Rate On 1-yr Govt Bon
U.S. Interest Rate On 1-yr Govt Bond)
wo decimalplaces.) 3.87% Implied Real Rate = ((1 + Nominal Interest Rate) / (1 + Expected Inflation) - 1)*100%
1.69% Implied Real Rate = ((1 + Nominal Interest Rate) / (1 + Expected Inflation) - 1)*100%
malplaces.) 1.73% Implied Real Rate = ((1 + Nominal Interest Rate) / (1 + Expected Inflation) - 1)*100%
+ Expected Inflation) - 1)*100%
Round to two decimalplaces.) 110.49 Starting Spot Rate = (Current Japanese Yen Rate / Current U.S. Dollar Ra
106.59 Future Spot Exchange Rate = Starting Spot Rate * (1 + Misery Index Japan)
n/A$. (Round to two decimalplaces.) 96.59 Starting Spot Rate = (Current Japanese Yen Rate / Current Australia Doll
93.96 Future Spot Exchange Rate = Starting Spot Rate * (1 + Misery Index Japan)
(Round to four decimalplaces.) 1.14 Starting Spot Rate = (Current Australia Rate / Current U.S. Dollar Rate) *
1.1344 Future Spot Exchange Rate = Starting Spot Rate * (1 + Misery Index Austra
n Rate / Current U.S. Dollar Rate) * (1 + 3-month Japanese Interest Rate)/(1 + 3-month U.S. Interest Rate)
t Rate * (1 + Misery Index Japan)/(1 + Misery Index US)
n Rate / Current Australia Dollar Rate) * (1 + 3-month Japanese Interest Rate)/(1 + 3-month Australia Interest Rate)
t Rate * (1 + Misery Index Japan)/(1 + Misery Index Australia)
te / Current U.S. Dollar Rate) * (1 + 3-month Australia Interest Rate)/(1 + 3-month U.S. Interest Rate)
t Rate * (1 + Misery Index Australia)/(1 + Misery Index U.S)
Question 1 Laura Cervantes. Laura Cervantes is a currency speculator and she sells eight June futures contracts for
Assumption a b
Number of pesos per future contracts -500,000 -500,000
Number of contracts 8 8
Buy or sell pesos future Sell Sell
Ending spot rate ($/Ps) 0.12008 0.09806
June Futures Setttle Price ($/Ps) 0.10773 0.10773
a. What is the value of her position at maturity if the ending spot rate is $0.12009/Ps?
The value ofAmber's position is $. (Round to the nearest cent. Use a minus sign if value isnegative.)
b. What is the value of her position at maturity if the ending spot rate is $0.09825/Ps?
The value ofAmber's position is $. (Round to the nearest cent. Use a minus sign if value isnegative.)
c. What is the value of her position at maturity if the ending spot rate is $0.11016/Ps?
The value ofAmber's position is $. (Round to the nearest cent. Use a minus sign if value isnegative.)
lls eight June futures contracts for 500,000 pesos at the closing price quoted here:
c
-500,000
8
Sell
0.11004 Find in Question
0.10773
0.12009/Ps?
$
minus sign if value isnegative.) -49400 Value = -Notional Principal * (Spot - Future (Settle)) * N
0.09825/Ps?
$
minus sign if value isnegative.) 38680 Value = -Notional Principal * (Spot - Future (Settle)) * N
0.11016/Ps?
$
minus sign if value isnegative.) -9240 Value = -Notional Principal * (Spot - Future (Settle)) * N
pot - Future (Settle)) * Number of contracts
Assumptions Values
Current spot rate (US$/Singapore dollar) 0.6000
Days to maturity 90
Expected spot rate in 90 days (US$/Singapore dollar) 0.7005
a. Should Cece buy a put on Singapore dollars or a call on Singaporedollars? (Select the best choicebelo
A. Since Cece expects the Singapore dollar to appreciate versus the U.S.dollar, she should buy a call on
/S$ each, and then immediately resell them in the open market at $0.7005/S$ each for a profit.(If her e
B.Since Cece expects the Singapore dollar to appreciate versus the U.S.dollar, she should buy a call on
/S$ each, and then immediately resell them in the open market at $ 0.6500/S$ each for a profit.(If her
C. Since Cece expects the Singapore dollar to appreciate versus the U.S.dollar, she should buy a put on
/S$ each, and then immediately resell them in the open market at $0.7005/S$ each for a profit.(If her e
D. Since Cece expects the Singapore dollar to appreciate versus the U.S.dollar, she should buy a call on
/S$ each, and then immediately rebuy them in the open market at $0.7005/S$ each for a profit.(If her
c. What isCece's gross profit and net profit(including premium) if the spot rate at the end of 90 days is in
Cece's net profit(including premium), if the spot rate at the end of 90 days is $. (Round to five decimal
d. What isCece's gross profit and net profit(including premium) if the spot rate at the end of 90 days is $0
If the spot rate at the end of 90 days is 0.8006
She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar($/S$) cross rate. The current spot rate is $0.6000 /S$.
eciate versus the U.S. dollar in the coming 90 days, probably to about $0.7005/S$. She has the following options on the Singapore dollar t
t the end of 90 days is indeed $0.7005/S$? (Round to five decimalplaces.) 0.05050 Gross Profit = Expected Spot Rate 90 d
. (Round to five decimalplaces.) 0.05004 Net Profit =Expected Spot Rate 90 days
t the end of 90 days is $0.8006/S$? (Round to five decimalplaces.) 0.15060 Gross Profit = New Expected Spot Ra
0.15014 Net Profit = New Expected Spot Rate
t spot rate is $0.6000 /S$.
ns on the Singapore dollar to choosefrom:
Buy A Call 1
Buy A Put 0
a. Kiko's profit or loss at maturity if the ending spot rate is ¥109/$ is $. (Round to the nearest cent and ind
b. Kiko's profit or loss at maturity if the ending spot rate is ¥114/$ is $. (Round to the nearest cent and ind
c. Kiko's profit or loss at maturity if the ending spot rate is ¥121/$ is $. (Round to the nearest cent and ind
d Kiko's profit or loss at maturity if the ending spot rate is ¥125/$ is $. (Round to the nearest cent and ind
e. Kiko's profit or loss at maturity if the ending spot rate is ¥129/$ is $. (Round to the nearest cent and ind
f. Kiko's profit or loss at maturity if the ending spot rate is ¥134/$ is $. (Round to the nearest cent and ind
STEP 1 First, calculate the ending spot rate in US$/¥
STEP 2 Calculate the gross profit. If the answer is a negative number then the gross profit is $0.00
STEP 3 Calculate the net profit
f. Kiko's profit or loss at maturity if the ending spot rate is ¥141/$ is $. (Round to the nearest cent and ind
nd to the nearest cent and indicate a loss by using a negativesign.) 1000.00 Total Net Profit = Notional Principa
nd to the nearest cent and indicate a loss by using a negativesign.) 1000.00 Total Net Profit = Notional Principa
nd to the nearest cent and indicate a loss by using a negativesign.) 1000.00 Total Net Profit = Notional Principa
nd to the nearest cent and indicate a loss by using a negativesign.) 1000.00 Total Net Profit = Notional Principa
nd to the nearest cent and indicate a loss by using a negativesign.) -2100.78 Total Net Profit = Notional Principa
nd to the nearest cent and indicate a loss by using a negativesign.) -5716.42 Total Net Profit = Notional Principa
0.007463 Ending Spot Rate in US$/¥ = 1 / En
ss profit is $0.00 0.0005373 Gross Profit = Strike Price - Ending
-0.000457 Net Profit = Premium - Gross Profit
nd to the nearest cent and indicate a loss by using a negativesign.) -10347.52 Total Net Profit = Notional Principa
Assumptions Values
Current Spot Rate US$/£ 1.4265
Expected Ending Spot Rate in 30 to 60 days US$/£ 1.3200
Potential Investment Principal Per Person (£) 230,000
a. Because his expectation is for"30 to 60days" he should confine his choices to the 60-day options to be
b. The return on investment(ROI) at the strike price of $1.36/£ is. (Round to the nearestinteger.)
c. The return on investment(ROI) at the strike price of $1.34/£ is. (Round to the nearestinteger.)
d. The return on investment(ROI) at the strike price of $1.32/£ is. (Round to the nearestinteger.)
e. Arthur should purchase the60-day option at strike price $1.34/£. (Select from thedrop-down menu.)
s choices to the 60-day options to be sure and capture the timing of the exchange rate change. (Select from thedrop-down menu.)
und to the nearestinteger.) 1105% Return on Investment (ROI) = (Expected Profit (STEP 4) / I
und to the nearestinteger.) 1216% Return on Investment (ROI) = (Expected Profit (STEP 4) / I
und to the nearestinteger.) -100% Return on Investment (ROI) = (Expected Profit (STEP 4) / I
ption price.
e increasingly less likely to end up in the money.
pick the strike price which will yield the required return.
expects the pound to fall to about $1.40/£.
ith a minimum stake of £230,000
ed in U.S. dollars. Arthur is convinced that
l yield the 25%
rity, andup-front premium expense.
hedrop-down menu.)
(Expected Profit (STEP 4) / Initial Investment at Current Spot Rate (STEP 2))*100%
(Expected Profit (STEP 4) / Initial Investment at Current Spot Rate (STEP 2))*100%
(Expected Profit (STEP 4) / Initial Investment at Current Spot Rate (STEP 2))*100%
Variable
Spot rate (domestic/foreign) S0 $
Forward rate (domestic/foreign) F0 $
Strike rate (domestic/foreign) X $
Domestic interest rate (% p.a.) rd
Foreign interest rate (% p.a.) rf
Time (years, 365 days) T
Days equivalent
Volatility (% p.a.) s
d1
d2
N(d1)
N(d2)
Assumptions
Spot Rate 1.2485 Given in Question
e 2.718
a. The same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2485/€
`
at a strike rate of $1.2496/€ will cost the buyer $0.0486/€, or 3.88%.
27/€. What would the same call option cost if the volatility was reduced to 10.500 %
0.0059 d1 0.0988
-0.0991 d2 -0.0062
0.5024 N(d1) 0.5394
0.4605 N(d2) 0.4975
0.0486 c € 0.0349
0.0546 p € 0.031
3.88 % c 4.37 %
4.36 % p 3.88 %
n the spot rate fell to $1.2485/€ would be $/€. (Round to four decimalplaces.) 0.0465
1.000
1.2394
-0.03
-0.13
0.4898
0.4480
1.000
0.8042
0.10
-0.01
0.5391
0.4973
Call Option Premium = e((-Domestic Interest Rate/100) * Time) * (Forward Rate * N(d1) - Strike Rate * N(d2))
a. The simple yield for the3-month Treasury bills is %. (Round to four decimalplaces.)
b. The simple yield for the6-month Treasury bills is %. (Round to four decimalplaces.)
c. The annualized yield for the3-month Treasury bills is %. (Round to four decimalplaces.)
d. The annualized yield for the6-month Treasury bills is %. (Round to four decimalplaces.)
2009 fell to very low levels as a result of the combined events surrounding the global financial crisis.
h Tresury bills auctioned on March9, 2009, listed here.
malplaces.) 0.0605% Simple Yield 3-month = Discount On Sale / Price Paid On Purchase
malplaces.) 0.2321% Simple Yield 6-month = Discount On Sale / Price Paid On Purchase
urchase))^(360/Days) - 1
Question 2 BBC(Australia). Botany Bay Corporation(BBC) of Australia seeks to borrow US$ 30,000,000 in the euro
Investigation leads to three possibilities. Compare the alternatives and make a recommendation.
a. Botany Bay could borrow the US$ 30,000,000 for two years at a fixed 5% rate of interest
For Alternative1, the interest cost per year is $ for the first year and $ for the second year. (Round to th
For Alternative1, the certainty over access to capitalis: certain for the first 6months, certain for the se
certain for the third 6months, and certain for the fourth 6 months. (Select from thedrop-down menus
For Alternative1, the certainty over cost of capitalis: certain for the first 6months, certain for the seco
certain for the third 6months, and certain for the fourth 6 months. (Select from thedrop-down menus
b. Botany Bay could borrow the US$ 30,000,000 at LIBOR + 1.500%. LIBOR is currently 3.500%, and the rat
For Alternative2, the interest cost for the first six months is $. (Round to the nearestdollar.)
For Alternative1, the certainty over access to capitalis: certain for the first 6months, certain for the se
certain for the third 6months, and certain for the fourth 6 months. (Select from thedrop-down menus
For Alternative1, the certainty over cost of capitalis: certain for the first 6months, uncertain for the se
uncertain for the third 6months, and uncertain for the fourth 6 months. (Select from thedrop-down m
c. Botany Bay could borrow the US$ 30,000,000 for one year only at 4.500%. At the end of the firstyear, B
For Alternative3, the interest cost for the first year is $ and for the second year is. (Round to the neares
For Alternative1, the certainty over access to capitalis: certain for the first 6months, certain for the se
uncertain for the third 6months, and uncertain for the fourth 6 months. (Select from thedrop-down m
For Alternative1, the certainty over cost of capitalis: certain for the first 6months, certain for the seco
certain for the third 6months, and certain for the fourth 6 months. (Select from thedrop-down menus
d. Only Alternative 1 has a certain access and cost of capital for the full2-year period. Alternative 3, posse
Alternative 2 has certain access to capital for bothyears, but the interest costs in the final 3 of 4 periods
Therefore, depending on thecompany's business needs and tolerance for interest raterisk, it could cho
rrow US$ 30,000,000 in the eurodollar market. Funding is needed for two years.
make a recommendation.
R is currently 3.500%, and the rate would be reset every six months.
to the nearestdollar.) 750000
0%. At the end of the firstyear, Botany Bay would have to negotiate for a newone-year loan. Yr1
ond year is. (Round to the nearest dollar and select from thedrop-down menu.) 1350000
-year period. Alternative 3, possessing a lower interest cost in year1, has no guaranteed access to capital in the second year.
est costs in the final 3 of 4 periods is uncertain.
for interest raterisk, it could choose between Alternatives 1 and 2. (Select from thedrop-down menus.)
Yr2
1500000 Annual Interest Paid = Amount Borrowed * Annual Interest Rate
Semi-Annual Interest Paid = Amount Borrowed * (Annual Interest Rate + Spread) / (2)
Yr2
Unknown Annual Interest Paid = Amount Borrowed * Annual Interest Rate
Assumptions Values
Notional Principal 5200000
LIBOR, Per Annum 3.99%
Spread Paid Over LIBOR, Per Annum 2.00%
Swap Rate, To Pay Fixed, Per Annum 7.005%
Weighted Average Cost of Capital (WACC) 12%
LIBOR Rise 50%
LIBOR Fell 25%
a. If LIBOR rises at the rate of 50 basis points per6-month period, startingtomorrow, how much does Hea
The swap COST for the firstsix-month period is $. (Select from thedrop-down menu and round to the n
The swap COST for the third six-month period is $. (Select from thedrop-down menu and round to the
STEP 1 Calculate the expectedLIBOR
STEP 2 Calculate the expected interest paymentrate
STEP 3 Calculate the net interestrate
STEP 4 Calculate the net interest after swap(in dollars)
STEP 5 Calculate the loan agreement interest(in dollars)
The swap COST for the fourth six-month period is $. (Select from thedrop-down menu and round to th
STEP 1 Calculate the expectedLIBOR
STEP 2 Calculate the expected interest paymentrate
STEP 3 Calculate the net interestrate
STEP 4 Calculate the net interest after swap(in dollars)
STEP 5 Calculate the loan agreement interest(in dollars)
b. If LIBOR falls at the rate of 25 basis points per6-month period, startingtomorrow, how much does Heat
The swap COST for the firstsix-month period is $nothing. (Select from thedrop-down menu and round
The swap COST for the secondsix-month period is $. (Select from thedrop-down menu and round to th
STEP 1 Calculate the expectedLIBOR
STEP 2 Calculate the expected interest paymentrate
STEP 3 Calculate the net interestrate
STEP 4 Calculate the net interest after swap(in dollars)
STEP 5 Calculate the loan agreement interest(in dollars)
The swap COST for the third six-month period is $. (Select from thedrop-down menu and round to the
STEP 1 Calculate the expectedLIBOR
STEP 2 Calculate the expected interest paymentrate
STEP 3 Calculate the net interestrate
STEP 4 Calculate the net interest after swap(in dollars)
STEP 5 Calculate the loan agreement interest(in dollars)
The swap COST for the fourth six-month period is $. (Select from thedrop-down menu and round to th
STEP 1 Calculate the expectedLIBOR
STEP 2 Calculate the expected interest paymentrate
STEP 3 Calculate the net interestrate
STEP 4 Calculate the net interest after swap(in dollars)
STEP 5 Calculate the loan agreement interest(in dollars)
eves interest rates are going torise, so she wants to swap her futurefloating-rate interest payments for fixed rates.
he next twoyears, with payments due semiannually. LIBOR is currently 3.99% per annum.
six months from now. Heather finds that she can swap her current floating-rate payments for fixed payments of 7.005%
her calculates to be 6% per6-month period, compoundedsemiannually).
row, how much does Heather save or cost her company by making thisswap?
menu and round to the nearestdollar.) -65390 Swap Savings (Or Cost) = Net Interest A
wn menu and round to the nearestdollar.) -52390 Swap Savings (Or Cost) = Net Interest A
4.990% Expected LIBOR = Current LIBOR + 50 B
-3.495% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-181740 Loan Agreement Interest (In Dollars) =
n menu and round to the nearestdollar.) -39390 Swap Savings (Or Cost) = Net Interest A
5.490% Expected LIBOR = Current LIBOR + 50 B
-3.745% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-194740 Loan Agreement Interest (In Dollars) =
wn menu and round to the nearestdollar.) -26390 Swap Savings (Or Cost) = Net Interest A
5.990% Expected LIBOR = Current LIBOR + 50 B
-3.995% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-207740 Loan Agreement Interest (In Dollars) =
ow, how much does Heather save or cost her company by making thisswap?
p-down menu and round to the nearestdollar.) -84890 Swap Savings (Or Cost) = Net Interest A
wn menu and round to the nearestdollar.) -91390 Swap Savings (Or Cost) = Net Interest A
3.490% Expected LIBOR = Current LIBOR + 50 B
-2.745% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-142740 Loan Agreement Interest (In Dollars) =
n menu and round to the nearestdollar.) -97890 Swap Savings (Or Cost) = Net Interest A
3.240% Expected LIBOR = Current LIBOR + 50 B
-2.620% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-136240 Loan Agreement Interest (In Dollars) =
wn menu and round to the nearestdollar.) -104390 Swap Savings (Or Cost) = Net Interest A
2.990% Expected LIBOR = Current LIBOR + 50 B
-2.495% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-129740 Loan Agreement Interest (In Dollars) =
ts of 7.005%
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
LIBOR = Current LIBOR + 50 Basic Points
Interest Payment = (- Expected LIBOR For 6 months ) - (Spread For 6 months)
est = Expected Interest payment + (- Swap Rate For 6 months) + (Expected LIBOR For 6 months)
est After Swap (In Dollars) = Notional Principal * (Net Interest Rate)
eement Interest (In Dollars) = Notional Principal * (Expected Interest Rate)
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
LIBOR = Current LIBOR + 50 Basic Points
Interest Payment = (- Expected LIBOR For 6 months ) - (Spread For 6 months)
est = Expected Interest payment + (- Swap Rate For 6 months) + (Expected LIBOR For 6 months)
est After Swap (In Dollars) = Notional Principal * (Net Interest Rate)
eement Interest (In Dollars) = Notional Principal * (Expected Interest Rate)
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
LIBOR = Current LIBOR + 50 Basic Points
Interest Payment = (- Expected LIBOR For 6 months ) - (Spread For 6 months)
est = Expected Interest payment + (- Swap Rate For 6 months) + (Expected LIBOR For 6 months)
est After Swap (In Dollars) = Notional Principal * (Net Interest Rate)
eement Interest (In Dollars) = Notional Principal * (Expected Interest Rate)
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
LIBOR = Current LIBOR + 50 Basic Points
Interest Payment = (- Expected LIBOR For 6 months ) - (Spread For 6 months)
est = Expected Interest payment + (- Swap Rate For 6 months) + (Expected LIBOR For 6 months)
est After Swap (In Dollars) = Notional Principal * (Net Interest Rate)
eement Interest (In Dollars) = Notional Principal * (Expected Interest Rate)
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
LIBOR = Current LIBOR + 50 Basic Points
Interest Payment = (- Expected LIBOR For 6 months ) - (Spread For 6 months)
est = Expected Interest payment + (- Swap Rate For 6 months) + (Expected LIBOR For 6 months)
est After Swap (In Dollars) = Notional Principal * (Net Interest Rate)
eement Interest (In Dollars) = Notional Principal * (Expected Interest Rate)
ings (Or Cost) = Net Interest After Swap (In Dollars) - (Loan Agreement Interest (In Dollars))
LIBOR = Current LIBOR + 50 Basic Points
Interest Payment = (- Expected LIBOR For 6 months ) - (Spread For 6 months)
est = Expected Interest payment + (- Swap Rate For 6 months) + (Expected LIBOR For 6 months)
est After Swap (In Dollars) = Notional Principal * (Net Interest Rate)
eement Interest (In Dollars) = Notional Principal * (Expected Interest Rate)
Question 4 Saharan Debt Negotiations. The country of Sahara is negotiating a new loan agreement with a consortiu
$220 million. But there are still wide differences of opinion on the final interest rate and maturity. The b
The banks also believe the interest rate will need to be 12.249% perannum, but Sahara believes that is
Loan 0 Payments 1 2
Principal $220,000,000 Interest -26,947,800 -23,647,950
Interest rate 12.249% Principal -26,939,749 -30,239,599
Maturity (years) 6 Total -53,887,549 -53,887,549
a. What would be the annual amortizing loan payments for the bankconsortium's proposal?
The annual amortizing loan payments for the bankconsortium's proposal is $. (Round to the nearestdo
N I/Y PV PMT FV
4 12.249% ($220,000,000) 72,811,776 0
c. How much would annual payments drop on the bankconsortium's proposal if the same loan was stretch
If the same loan was stretched out from four to sixyears, the annual payments would drop on the bank
STEP 1 Calculate Annual Amortizing Loan Payment 6 Yrs, 12.249%
N I/Y PV PMT FV
6 12.249% ($220,000,000) 53,887,549 0
oan agreement with a consortium of international banks. Both sides have a tentative agreement on the principallong dash
nterest rate and maturity. The banks would like a shorter loan, four years inlength, while Sahara would prefer a long maturity of six years.
um, but Sahara believes that is toohigh, arguing instead for 11.748%. The initial values are shown in thetable:
3 4 5 6
-19,943,902 -15,786,144 -11,119,103 -5,880,396
-33,943,647 -38,101,405 -42,768,446 -48,007,153
-53,887,549 -53,887,549 -53,887,549 -53,887,549
rtium's proposal?
al is $. (Round to the nearestdollar.)
references?
(Round to the nearestdollar.)
osal if the same loan was stretched out from four to sixyears? 18,924,227 Drop On The Bank Consor
yments would drop on the bankconsortium's proposal by $. (Round to the nearestdollar.)
allong dash
a long maturity of six years.
Drop On The Bank Consortium's Proposal = Annual Amortizing Loan Payments For Bank Consortium's proposal - Annual Amortizing Loan
osal - Annual Amortizing Loan Payment 6 Yrs, 12.249%
Question 5 Lluvia and Paraguas. Lluvia Manufacturing and Paraguas Products both seek funding at the lowest poss
wants the security offixed-rate borrowing. Lluvia is the more creditworthy company. They face the follo
in both types of borrowing. Lluvia wantsfloating-rate debt, so it could borrow at LIBOR plus 1.000 %. Ho
Paraguas wantsfixed-rate debt, so it could borrow fixed at 13.000%. However, it could borrow floating a
Assumptions Lluvia
Credit Rating AAA
Prefers To Borrow Floating
Fixed-Rate Cost Of Borrowing 9.000%
Floating-Rate Cost Of Borrowing
LIBOR 6.000%
Spread 1.000%
Total Floating-Rate 7.000%
b. Lluvia's net interest after a swap with Paraguas is %. (Round to three decimalplaces.)
c. Paraguas's net interest after a swap with Lluvia is %. (Round to three decimalplaces.)
d. Lluvia's savings on borrowing versus net swap is %. (Round to three decimalplaces.)
e. Paraguas's savings on borrowing versus net swap is %. (Round to three decimalplaces.)
Therefore, Lluvia should borrow at the fixed rate and Paraguas should borrow at the floating rate. (Sele
cts both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating-rate borrowing, while Paraguas
editworthy company. They face the following rate structure. Lluvia, with the better creditrating,has lower borrowing costs
could borrow at LIBOR plus 1.000 %. However, it could borrow fixed at 9.000% and swap forfloating-rate debt.
00%. However, it could borrow floating at LIBOR + 2.000% and swap forfixed-rate debt. What should theydo? (LIBOR is 6.000%.)
paraguas
BBB
Fixed
13.000%
6.000%
2.000%
8.000%
3.000% Lluvia's Comparative Advantage = (Paraguas Fixed Rate - Lluvia Fixed Rate) - (Paraguas
hree decimalplaces.) -6.000% Lluvia's Net interest After Swap = (- Lluvia Fixed Rate) + (-Paraguas LIBOR Rate) + Lluvia
hree decimalplaces.) -11.000% Paraguas's Net Interest After Swap = (-Paraguas Floating Rate) + (Paraguas's LIBOR Rate
ree decimalplaces.) 1.000% Lluvia Savings = Lluvia's Floating Rate + (Lluvia's Net Interest After Swap)
o three decimalplaces.) 2.000% Paraguas Savings = Paraguas's Fixed Rate + (Paraguas's Net Interest After Swap)
BOR is 6.000%.)
a. The notional principal in Swiss francs is SFr. (Round to the nearest Swissfranc.)
In the first year of theswap, Ganado will receive $. (Round to the nearestdollar.)
In the second year of theswap, Ganado will receive $. (Round to the nearestdollar.)
In the third year of theswap, Ganado will receive $. (Round to the nearestdollar.)
In the first year of theswap, Ganado will pay SFr. (Round to the nearest Swissfranc.)
In the second year of theswap, Ganado will pay SFr. (Round to the nearest Swissfranc.)
In the third year of theswap, Ganado will pay SFr. (Round to the nearest Swissfranc.)
Ganado, however, decided to unwind the swap after one year - thereby having two years left on the sett
The present value of the dollar cash flow in year 2 is $. (Round to the nearestdollar.)
The present value of the dollar cash flow in year 3 is $. (Round to the nearestdollar.)
The cumulative present value of the remaining dollar cash flows is $. (Round to the nearestdollar.)
The present value of the franc cash flow in year 2 is SFr. (Round to the nearest Swissfranc.)
The present value of the franc cash flow in year 3 is SFr. (Round to the nearest Swissfranc.)
The cumulative present value of the remaining franc cash flows is SFr. (Round to the nearest Swissfran
The conversion from Swiss francs to dollars of the cash outflow is $. (Round to the nearestdollar.)
The settlement of the unwinding is $. (Round to the nearestdollar.)
This is a cash receipt by Ganado from the swap dealer. (Select from thedrop-down menus.)
tion entered into a3-year cross-currency interest rate swap to receive U.S. dollars and pay Swiss francs.
long dash thereby having two years left on the settlement costs of unwinding the swap after one year.
llowing rates nowapply:
rest Swissfranc.) 15225000 Notional Principal In Swiss Francs = Notional Principal in U.S
the nearestdollar.) 583800 U.S. Dollars Received Year 1 = Notional Principal * U.S. Dollar 3
to the nearestdollar.) 583800 U.S. Dollars Received Year 2 = Notional Principal * U.S. Dollar 3
o the nearestdollar.) 11083800 U.S. Dollars Received Year 3 = (Notional Principal * U.S. Dollar
he nearest Swissfranc.) 306023 Swiss Francs Paid Year 1 = Notional Principal In Swiss Francs * S
o the nearest Swissfranc.) 306023 Swiss Francs Paid Year 2 = Notional Principal In Swiss Francs * S
he nearest Swissfranc.) 15531023 Swiss Francs Paid Year 3 = (National Principal In Swiss Francs *
- thereby having two years left on the settlement costs of unwinding the swap after one year.
d to the nearestdollar.) 554943 Present Value = (Cash Flow)(U.S. Dollar Received - Notional Principal) *(1)/(1
d to the nearestdollar.) 10015144 Present Value = (Cash Flow)(U.S. Dollar Received Year 3) *(1)/(1 + Intere
ws is $. (Round to the nearestdollar.) 10570087 Cumulative PV Of Remaining Cash Flows = Present Value Of
nd to the nearest Swissfranc.) 298559 Present Value = (Cash Flow)(Swiss Francs Paid Year 1) *(1)/(1 + Interest
nd to the nearest Swissfranc.) 14782651 Present Value = (Cash Flow)(Swiss Francs Paid Year 1) *(1)/(1 + Interest
s is SFr. (Round to the nearest Swissfranc.) 15081209 Cumulative PV Of Remaining Cash Flows = Present Value Of
w is $. (Round to the nearestdollar.) 10054140 Cumulative PV Of Swiss Francs Cash Outflows In Dollars = C
515947 Settlement = Cash Inflow (Cumulative PV Of Remaining Cash Flows) - Cash Ou
nal Principal In Swiss Francs * Swiss Francs 3-Year Ask Rate) + Notional Principal In Swiss Francs
ash Flows = Present Value Of Cash Flow Year 2 + Present Value Of Cash Flow Year 3
ash Flows = Present Value Of Cash Flow Year 2 + Present Value Of Cash Flow Year 3
Cash Outflows In Dollars = Cumulative PV Of Remaining Cash Flows In Swiss Frans / Spot Rate
ve PV Of Remaining Cash Flows)
- Cash Outflow (Cumulative PV Of Swiss Francs Cash Outflows In Dollars)
Question 1 Bobcat Company. BobcatCompany, U.S.-based manufacturer of industrialequipment, just purchased a
The purchase price was Won7,500 million.Won1,000 million has already beenpaid, and the remaining W
The current spot rate is Won1,110/$, and the6-month forward rate is Won1,175/$. The6-month Korea
Bobcat can invest at these interestrates, or borrow at2% per annum above those rates. A6-month call
while the6-month put option at the same strike rate has a 2.4% premium.
Bobcat can invest at the rates givenabove, or borrow at2% per annum above those rates.
Bobcat's weighted average cost of capital is 10%. Compare alternate ways below that Bobcat might dea
Assumptions Values
Purchase Price 7,500,000,000
Already Paid 1,000,000,000
Remaining Payment (Accounts Payable) 6,500,000,000
Current Spot Rate 1,110
6-month Forward Rate 1,175
6-month Korean Won Interest Rate 16%
6-month U.S. dollar Interest Rate 4%
Borrow Interest Rate 2%
6-month Call Option / Put Option Strike Rate 1,200
Call Option Premium 3.0%
Put Option Premium 2.4%
Weighted Average Cost of Capital (WACC) 10%
a. How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 mon
How much in U.S. dollars will Bobcat pay in 6 months without a hedge if the expected spot rate in 6 mon
b. How much in U.S. dollars will Bobcat pay in 6 months with a forward markethedge?
c. How much in U.S. dollars will Bobcat pay in 6 months with a money market hedge?
e. What do you recommend?
The forward market hedge provides the lowest certain cost hedging method for payment settlement.
ipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment.
paid, and the remaining Won6,500 million is due in six months.
75/$. The6-month Korean won interest rate is 16% perannum, the6-month U.S. dollar rate is 4% per annum.
ose rates. A6-month call option on won with a Won1,200/$ strike rate has a 3.0% premium,
those rates.
w that Bobcat might deal with its foreign exchange exposure.
pected spot rate in 6 months is assumed to be Won1,110 /$? 5855855.86 Payments = Accounts payable (
pected spot rate in 6 months is assumed to be Won1,175 /$? 5531914.89 Payments = Accounts payable (
he expected spot rate in 6 months is assumed to be Won1,300 /$? 5184459.46 Payments = (Accounts Payable
or payment settlement.
Payments = Accounts payable (1/Spot Rate in 6 months)
Payments = Accounts payable (1/6-months Forward Rate)
Payments = (Accounts Payable) / (1 + Foreign Interest Rate/ 2) * (1 / Spot Rate) * (1 + Cost of Capital / 2)
Option Premium in 6 months = Accounts Payable * Premium Rate * (1 / Spot Rate) * (1 + Cost of Capital/2)
Payments = (Accounts Payable * 1 / Strike Rate) + Option Premium in 6 months
Assumptions Values
Actual Pegged Rate 24.5
Expected Exchange Rate 41.5
Debt 54,000,000
Interest Rate 8.23%
Interest Payment 900,000,000
a. The amount of the foreign exchange loss incurred on the transaction is B. (Round to the nearest whole
red enormous losses with the coming of the Asian crisis in 1997.
d-1990s, taking on massive quantities offoreign-currency-denominated debt
rate of B24.5/$ in July1997, Siam's interest payments alone were over
.23% on its U.S. dollar debt at thattime). Assuming Siam Cement took out
year when the spot exchange rate had stabilized at Upper B 41.5/$ ,
und to the nearest wholenumber.) 993551400 Loss = Debt * (1 + Interest Rate) * ABS(Actual Exchange
) * ABS(Actual Exchange Rate - Expected Exchnage Rate)
Question 3 Embraer of Brazil. Embraer of Brazil is one of the two leading global manufacturers of regional jets(Bom
Regional jets are smaller than the traditional civilian airliners produced by Airbus andBoeing, seating be
Embraer has concluded an agreement with a regional U.S. airline to produce and deliver four aircraft on
Although Embraer will be paid in U.S.dollars, it also possesses a currency exposure of inputs - it must pa
for inputs one year from now(but they will be delivering the subcomponents throughout theyear). The
but it has been steadily appreciating against the U.S. dollar over the past three years. Forward contracts
Citibank Brasil has not explicitly provided Embraer a forward ratequote, but has stated that it will proba
eurocurrency rate and the 10.50% Brazilian government bond rate. Advise Embraer on its currency expo
Assumptions Values
Accounts Receivable 80,000,000
Accouns Payable 24,000,000
Current Spot Rate (R$) 1.8073
U.S. Dollar Eurocurrency Rate 3.25%
Brazilian Government Bond Rate 10.50%
a. How much of net cash position in Brazilian reais will Embraer receive in one year without a hedge if the
b. How much in Brazilian reais will Embraer receive in one year if the net cash position is covered by a one
c. In this case because the real is selling forward at a considerablediscount, the net long position - if sold f
ufacturers of regional jets(Bombardier of Canada is theother).
y Airbus andBoeing, seating between 50 and 100 people on average.
uce and deliver four aircraft one year from now for $80 million.
exposure of inputs - it must pay foreign suppliers $ 24 million
ents throughout theyear). The current spot rate on the Brazilian real(R$) is R$1.8073/$,
three years. Forward contracts are difficult to acquire and are considered expensive.
but has stated that it will probably be pricing a forward off the current 3.25% U.S. dollar
e Embraer on its currency exposure.
ne year without a hedge if the expected spot rate in one year is expected to be R$1.8073/$? 101208800
1.9342
, the net long position - if sold forward - yields considerably more reais than the current spot rate. TRUE
Net Position Without Hedge = (Accounts Receivable - Account Payable) * Spot Rate In One Year
Implied One-year Forward Rate = Current Spot Rate * (1 + One-year Brazilian Government Bond Rate) / (1 + One-Ye
Net Position With Forward Hedge = (Accounts Receivable - Account Payable) * Implied One-Year Forward Rate
ment Bond Rate) / (1 + One-Year U.S. Dollar Eurocurrency Rate)
Caribou expects to receive multiple payments in Danish kroner over the next year. Kr3,600,000 is due in
Using the following spot and forward exchangerates, what would be the amount of forward cover requ
Assumptions Values
Spot rate, Kr/C$ 4.62
3-month forward rate, Kr/C$ 4.64
6-month forward rate, Kr/C$ 4.67
12-month forward rate, Kr/C$ 4.68
a. What would be the Canadian dollar amount of forward cover required by company policy in 3months?
What would be the Canadian dollar amount of forward cover required by company policy in 6 months?
What would be the Canadian dollar amount of forward cover required by company policy in 12 months?
not selectively hedge its transaction exposure.Instead, if the date of the transaction is known withcertainty,
ory forward coverformula:
ear. Kr3,600,000 is due in 90 days; Kr 1,900,000 is due in 180days; and Kr850,000 is due in one year.
unt of forward cover required by company policy for eachperiod?
pany policy in 3months? 581896.55 3-Month Forward Cover = Accounts Receivable * Percentag
pany policy in 6 months? 284796.57 6-Month Forward Cover = Accounts Receivable * Percentag
pany policy in 12 months? 90811.97 12-Month Forward Cover = Accounts Receivable * Percenta
ounts Receivable * Percentage Points * (1 / Forward Rate)
Assumptions Values
Total Percentage Hedge In Forward Market 70%
Total Percentage Hedge In Forward Market Increase 120%
Accounts Receivable 1790000
Current Spot rate 1.2221
90-day Forward Rate 1.2281
Correct Ending Spot Rate 1.1633
Wrong Ending Spot Rate 1.2546
How much in U.S. dollars will Chronos receive in 90 days if70% of the transaction exposure is hedged w
Transaction Exposure Hedge 70%
How much in U.S. dollars will Chronos receive in 90 days if70% of the transaction exposure is hedged w
Transaction Exposure Hedge 120%
How much in U.S. dollars will Chronos receive in 90 days if70% of the transaction exposure is hedged w
Transaction Exposure Hedge 70%
How much in U.S. dollars will Chronos receive in 90 days if70% of the transaction exposure is hedged w
Transaction Exposure Hedge 120%
What would be considered the most conservative transaction exposure management policy by afirm? H
If the value of the foreign currency is expected todepreciate, the 120% hedge will yield the greatest dol
while if the value of the foreign currency is expected toappreciate, the 70% hedge will yield the greates
(Select from thedrop-down menus.)
b. What would be considered the most conservative transaction exposure management policy by afirm? H
"A full(100%) hedge is the most conservative hedging policy. Any time a firm may choose to leave any p
(therefore creating a net shortposition), the firm could experience nearly unlimited losses orgains."
The statement above is TRUE. (Select from thedrop-down menu.)
ycountries, selling in local currencies to stores and distributors.
dividual transaction exposure ishedged, mostly in the forwardmarket,
he70% hedge may be increased up to a120% hedge if devaluation or depreciation appears imminent.
d a90-day invoice to its buyer for euro1,790,000.
o. Chronos' treasurer, MannyHernandez, has a very good track record in predicting exchange rate movements.
to 120days, possibly to around $1.1633/euro.
ction exposure is hedged with the forward contract? 2198299 Proceeds = Accounts Receivable * 90-day Forward Rate
tion exposure is hedged with the forwardcontract? 2163501 Proceeds = (Accounts Receivable * Hedge Proportion *
tion exposure is hedged with the forwardcontract? 2221497 Proceeds = (Accounts Receivable * Hedge Proportion *
ction exposure is hedged with the forward contract? 2198299 Proceeds = Accounts Receivable * 90-day Forward Rate
tion exposure is hedged with the forwardcontract? 2212530 Proceeds = (Accounts Receivable * Hedge Proportion *
tion exposure is hedged with the forwardcontract? 2188812 Proceeds = (Accounts Receivable * Hedge Proportion *
le * Hedge Proportion * Forward Rate) + (Accounts Receivable * (1 - Hedge Proportion) * Ending Spot Rate)
le * Hedge Proportion * Forward Rate) + (Accounts Receivable * (1 - Hedge Proportion) * Ending Spot Rate)
le * Hedge Proportion * Forward Rate) + (Accounts Receivable * (1 - Hedge Proportion) * Ending Spot Rate)
le * Hedge Proportion * Forward Rate) + (Accounts Receivable * (1 - Hedge Proportion) * Ending Spot Rate)
Question 6 Burton Manufacturing. Jason Stedman is the director of finance for BurtonManufacturing, aU.S.-based
Burton's system combines alow-cost active tag that is attached to inventory items(the tag emits an ext
thelow-grade emissions for inventory control. Burton has completed the sale of an inventory managem
The exchange rates shown in the popupwindow, were available to Burton on the datesshown, correspo
a. What will be the amount of foreign exchange gain(loss) uponsettlement? (Round to the nearestdollar
b. If Jason hedges the exposure with a forward contract purchased on the date the product isshipped, wh
Enter a positive number for a gain or a negative number for a loss.
If Jason hedges the exposure with a forward contract purchased on the date the contract issigned, wha
Enter a positive number for a gain or a negative number for a loss.
finance for BurtonManufacturing, aU.S.-based manufacturer of handheld computer systems for inventory management.
ached to inventory items(the tag emits an extremelylow-grade radiofrequency) with custom designed hardware and software that track
completed the sale of an inventory management system to a British firm, Pegg Metropolitan(UK), for a total payment of £2,000,000.
ailable to Burton on the datesshown, corresponding to the events of this specific export sale. Assume each month is 30 days.
1.7599 90
1.7871 30
chased on the date the product isshipped, what will be the net foreign exchange gain(loss) onsettlement?
chased on the date the contract issigned, what will be the net foreign exchange gain(loss) onsettlement?
management.
ardware and software that tracks
otal payment of £2,000,000.
h month is 30 days.
-83800 Gain (Loss) = Accounts Receivable * (Spot Rate On Settlement Date - Spot Rate on Shipment Date)
-15000 Gain (Loss) = Accounts Receivable * (Forward Rate On Shipment Date - Spot Rate On Shipment Da
-60400 Gain (Loss) = Accounts Receivable * (Forward Rate On Signing Date - Spot Rate On Shipment Date)
Rate on Shipment Date)
Assumptions Values
90-day Account Receivable in pounds 3800000
Spot rate ($/pound) 1.7602
90-day forward rate ($/pound) 1.7496
3-month U.S. dollar investment rate 5.01%
3-month U.S. dollar borrowing rate 9.16%
3-month U.K. investment interest rate 8.58%
3-month U.K. borrowing interest rate 14.818%
Ganado's WACC 12.43%
Expected spot rate in 90 days ($/pound) 1.7987
Put options on the British pound:
Strike rate ($/pound) 1.74
Put option premium 1.50%
Strike rate ($/pound) 1.69
Put option premium 1.00%
a. How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90
How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90
How much in U.S. dollars will Ganado receive in 90 days without a hedge if the expected spot rate in 90
Expected Spot Rate 1.7987
b. How much in U.S. dollars will Ganado receive in 90 days with a forward markethedge?
c. How much in U.S. dollars will Ganado receive in 90 days with a money markethedge?
d. How much in U.S. dollars will Ganado receive in 90 days if Ganado covers the transaction exposure with
How much in U.S. dollars will Ganado receive in 90 days if Ganado covers the transaction exposure with
e. The money market hedge guarantees Ganado the greatest dollar value for the accounts receivable whe
ssed in this chapterlong dashhas concluded another large sale of telecommunications equipment to Regency (U.K.).
d that Ganado will only be able to borrow in the United Kingdom at 14.818 % per annum(due to credit concerns of the Britishbanks).
ternate ways below that Ganado might hedge its foreign exchange transaction exposure. Assume a 360-day financial year.
e expected spot rate in 90 days is the same as the current spot rate of $1.7602/pound?
e expected spot rate in 90 days is the same as the 90-day forward rate of $1.7496/pound?
e expected spot rate in 90 days is the same as the expected spot rate of $1.7987/pound?
transaction exposure with the $1.7400/pound put option and the pound depreciates below $1.7400/pound in 90days?
transaction exposure with the $1.6900/pound put option and the pound depreciates below $1.6900/pound in 90days?
e accounts receivable when using the cost of capital as the reinvestment rate (carry-forward rate).
erns of the Britishbanks).
financial year.
6650319 Proceeds = (Accounts Receivable) / (1 + U.K. borrowing Rate * 90/360) * Spot Rate * (1 + WACC * 90/360
103450 Option Premium In 90 days = Account Receivable * Premium Rate * Spot Rate * (1 + WACC * 90/360)
6508550 Proceeds = (Accounts Receivable * Strike Rate) - Option Premium in 90 Days
68967 Option Premium In 90 days = Account Receivable * Premium Rate * Spot Rate * (1 + WACC * 90/360)
6353033 Proceeds = (Accounts Receivable * Strike Rate) - Option Premium in 90 Days
pot Rate * (1 + WACC * 90/360)
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earning
translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the euro.
a. What is the amount of translation gain orloss? Enter a positive number for a gain and negative for a los
January 2, 2016
0.8000 480000
0.8000 800000
0.8000 1360000
1.2320 2956800
1.1600 8700000
-3736800
10560000
ber for a gain and negative for a loss. -3564000 Translation Gain (Loss) = CTA in 2016 - CTA in 2015
choicebelow.)
he Cumulative Translation Adjustment(CTA) account.
e Retained Earnings account.
e Total Assets account.
e Total Liabilities and Net Worth account.
n 2016 - CTA in 2015
Question 2 Ganado Europe(B). Using facts in the chapter for GanadoEurope, assume that the exchange rate on Jan
Recalculate GanadoEurope's translated balance sheet for January2, 2016, with the new exchange rate
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earning
translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the euro.
(c) Under the temporalmethod, the translation loss would be closed into retained earnings through the
than left as a separate line item as shown here.
a. What is the amount of translation gain orloss? Enter a positive number for a gain and negative for a los
c. Why does the translation loss or gain under the temporal method differ from the loss or gain under the
A.The exposed assets under the current rate method are larger than under the temporal method by the
B.The exposed assets under the current rate method are larger than under the temporal method by the
C.The exposed assets under the current rate method are larger than under the temporal method by the
D.The exposed assets under the current rate method are larger than under the temporal method by th
sume that the exchange rate on January2, 2016, in Exhibit 11.6 dropped in value from $1.2200/euro to $0.9100/euro.
2016, with the new exchange rate using the temporal rate method as
January 2, 2016
0.91 728000
0.91 910000
0.91 1183000
1.293 3232500
1.2641 7044900
?
12850400
ber for a gain and negative for a loss. -248000 Translation Gain (Loss) = Total Assets - Accounts Payable - Sh
choicebelow.)
e Total Assets account.
he Retained Earnings account.
e Cumulative Translation Adjustment(CTA) account.
e Total Liabilities and Net Worth account.
ffer from the loss or gain under the current rate method? (Select the best choicebelow.)
under the temporal method by the amount of accounts payable and common stock.
under the temporal method by the amount of short-term bank debt andlong-term debt.
under the temporal method by the amount of cash and accounts receivable.
n under the temporal method by the amount of inventory and net plant and equipment.
Assets - Accounts Payable - Short Term Bank Debt - Long-Term Debt - Common Stock - Retain Earnings
Question 3 Ganado Europe(D). Using facts in the chapter for GanadoEurope, assume that the exchange rate on Ja
Calculate GanadoEurope's translated balance sheet for January2, 2016, with the new exchange rate us
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earning
translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the euro.
(c) Under the temporalmethod, the translation loss would be closed into retained earnings through the
than left as a separate line item as shown here.
a. What is the amount of translation gain orloss? Enter a positive number for a gain and negative for a los
January 2, 2016
1.5 1350000
1.5 2700000
1.5 2700000
1.184 2249600
1.1512 6044200
?
15004800
ber for a gain and negative for a loss. -39000 Translation Gain (Loss) = Total Assets - Accounts Payable - Sho
choicebelow.)
e Total Assets account.
e Cumulative Translation Adjustment(CTA) account.
he Retained Earnings account.
e Total Liabilities and Net Worth account.
Assets - Accounts Payable - Short Term Bank Debt - Long-Term Debt - Common Stock - Retain Earnings
Question 4 BangkokInstruments, Ltd.(A). BangkokInstruments, Ltd., the Thai subsidiary of a U.S.corporation, is a s
Bangkok Instruments manufactures the instruments primarily for the oil and gas industry globally, thoug
includingcopper - its business has begun to grow rapidly. Sales are primarily to multinational companie
BangkokInstruments' balance sheet in thousands of Thai bahts(B) as of March 31 is shown in the popup
Exchange rates for translating BangkokInstruments' balance sheet into U.S. dollarsare:
Assumptions
April 1 exchangerate, after25% devaluation.
March 31 exchangerate, before25% devaluation. All inventory was acquired at this rate.
Historic exchange rate at which plant and equipment were acquired.
The Thai baht dropped in value from B34.00/$ to B45.33/$ between March 31 and April 1. Assuming no
from translation by both the current rate method and the temporal method. BangkokInstruments' tran
and the one using the temporal method is shownhere. Explain the translation gain or loss in terms of ch
31-Mar
Exchange Rate Translated
Assets In Bahts (B) (B/$) Accounts ($)
Cash 23000000 34 676471
Accounts receivable 35000000 34 1029412
Inventory 50000000 34 1470588
Net plant and equipment 59000000 34 1735294
Total 167000000 4911765
Liabilities and Net Worth
Accounts payable 17000000 34 500000
Bank loans 61000000 34 1794118
Common stock 16000000 23 695652
Retained earnings 73000000 37.98 1921995
Translation adjustment (CTA) — ?
Total 167000000 4911765
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earning
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the baht.
a. Using the translated balance sheet under the current ratemethod, what is the amount of translation ga
STEP 1
STEP 2
b. Using the translated balance sheet under the temporal method, what is the amount of translation gain o
Method Two
STEP 1
STEP 2
The temporal method results in a translationgain, as opposed to the CTA loss found under the current
This gain would be impossible under the current rate method because all assets are exposed under that
(Select from thedrop-down menus.)
idiary of a U.S.corporation, is a seismic instrument manufacturer.
l and gas industry globally, though with recent commodity price increases of all kinds
marily to multinational companies based in the United States and Europe.
f March 31 is shown in the popupwindow:
U.S. dollarsare:
Values
45.33
quired at this rate. 34.00
23.00
arch 31 and April 1. Assuming no change in balance sheet accounts between these twodays, calculate the gain or loss
thod. BangkokInstruments' translated balance sheet using the current rate method is shownhere,
slation gain or loss in terms of changes in the
1-Apr 31-Mar
Exchange Rate Translated Exchange Rate
(B/$) Accounts ($) Assets In Bahts (B) (B/$)
45.33 507390 Cash B23,000,000 34
45.33 772116 Accounts receivable 35000000 34
45.33 1103022 Inventory 50000000 34
45.33 1301566 Net plant and equipment 59000000 23
3684094 Total B167,000,000
Liabilities and Net Worth
45.33 375028 Accounts payable B17,000,000 34
45.33 1345687 Bank loans 61000000 34
23 695652 Common stock 16000000 23
37.98 1921995 Retained earnings 73000000 26.53
? Translation gain (loss) —
3684094 Total B167,000,000
m of additions to retained earnings of all (a) Dollar retained earnings before depreciation are the cumulative sum of additi
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the baht.
(c) Under the temporalmethod, the translation gain(loss) would be closed into
income statement rather than left as a separate line item as shown here.
at is the amount of translation gain orloss? Enter a positive number for a gain and negative for a loss. -654268
0
-654268
s the amount of translation gain orloss? Enter a positive number for a gain and negative for a loss. $147,026
$147,026
$0
$147,026
TA loss found under the current ratemethod, because of the different exchange rates used against net plant and equipment and the inve
all assets are exposed under thatmethod, whereas the temporal method carries net plant and equipment and inventory at relevant histo
31-Mar 1-Apr
Translated Exchange Rate Translated
Accounts ($) (B/$) Accounts ($)
$676,471 45.33 $507,390
1029412 45.33 772116
1470588 34 1470588
2565217 23 2565217
$5,741,688 $5,315,311
CTA On March 31 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
CTA On April 1 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
CTA On March 31 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
CTA On April 1 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
Exchange rates for translating BangkokInstruments' balance sheet into U.S. dollarsare:
Assumptions
April 1 exchangerate, after25% devaluation.
March 31 exchangerate, before25% devaluation. All inventory was acquired at this rate.
Historic exchange rate at which plant and equipment were acquired.
The Thai baht appreciated in value from B34.00/$ to B28.33/$ between March 31 and April 1. Assuming
from translation by both the current rate method and the temporal method. BangkokInstruments' tran
and the one using the temporal method is shownhere. Explain the translation gain or loss in terms of ch
31-Mar
Exchange Rate Translated
Assets In Bahts (B) (B/$) Accounts ($)
Cash 26000000 34 764706
Accounts receivable 35000000 34 1029412
Inventory 46000000 34 1352941
Net plant and equipment 59000000 34 1735294
Total 166000000 4882353
Liabilities and Net Worth
Accounts payable 18000000 34 529412
Bank loans 62000000 34 1823529
Common stock 20000000 24 833333
Retained earnings 66000000 38.91 1696079
Translation adjustment (CTA) — ?
Total 166000000 4882353
(a) Dollar retained earnings before appreciation are the cumulative sum of additions to retained earning
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before appreciation of the baht.
a. Using the translated balance sheet under the current ratemethod, what is the amount of translation ga
STEP 1
STEP 2
b. Using the translated balance sheet under the temporal method, what is the amount of translation gain o
Method Two
STEP 1
STEP 2
The temporal method results in a translationloss, as opposed to the CTA gain found under the current
This loss would be impossible under the current rate method because all assets are exposed under that
(Select from thedrop-down menus.)
idiary of a U.S.corporation, is a seismic instrument manufacturer.
l and gas industryglobally, though with recent commodity price increases of all kinds
marily to multinational companies based in the United States and Europe.
f March 31 is shown in the popupwindow:
U.S. dollarsare:
Values
28.33
quired at this rate. 34.00
24.00
n March 31 and April 1. Assuming no change in balance sheet accounts between these twodays, calculate the gain or loss
thod. BangkokInstruments' translated balance sheet using the current rate method is shownhere,
slation gain or loss in terms of changes in the
1-Apr 31-Mar
Exchange Rate Translated Exchange Rate
(B/$) Accounts ($) Assets In Bahts (B) (B/$)
28.33 917755 Cash B26,000,000 34
28.33 1235439 Accounts receivable 35000000 34
28.33 1623720 Inventory 46000000 34
28.33 2082598 Net plant and equipment 59000000 24
5859512 Total B166,000,000
Liabilities and Net Worth
28.33 635369 Accounts payable B18,000,000 34
28.33 2188493 Bank loans 62000000 34
24 833333 Common stock 20000000 24
38.91 1696079 Retained earnings 66000000 27.28
? Translation gain (loss) —
5859512 Total B166,000,000
m of additions to retained earnings of all (a) Dollar retained earnings before appreciation are the cumulative sum of additi
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before appreciation of the baht.
(c) Under the temporalmethod, the translation gain(loss) would be closed into
income statement rather than left as a separate line item as shown here.
at is the amount of translation gain orloss? Enter a positive number for a gain and negative for a loss. 506238
0
506238
s the amount of translation gain orloss? Enter a positive number for a gain and negative for a loss. ($111,845)
($111,845)
$0
($111,845)
TA gain found under the current ratemethod, because of the different exchange rates used against net plant and equipment and the inve
all assets are exposed under thatmethod, whereas the temporal method carries net plant and equipment and inventory at relevant histor
31-Mar 1-Apr
Translated Exchange Rate Translated
Accounts ($) (B/$) Accounts ($)
$764,706 28.33 $917,755
1029412 28.33 1235439
1352941 34 1352941
2458333 24 2458333
$5,605,392 $5,964,468
CTA On March 31 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
CTA On April 1 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
CTA On March 31 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
CTA On April 1 = Total Assets - Accounts Payable - Bank Loans - Common Stocks - Retain Earnings
Assumptions Values
Average Annual Sales 1,440,000,000
Present Exchnage Rate 125
Acount Receivable 30,000,000
Monthly Cash Collections 120,000,000
Annual Interest Rate 5.00%
b. What should be the terms of payment on the yenloan? (Select the best choicebelow.)
A.The loan should be repaid out of the monthly cashflow, with payments on principal only. The interest paym
B.Mauna Loa should borrow yen 30,000,000 accounts receivable to cover its accountingexposure, not only bor
C.The loan should be repaid out of the monthly cashflow, with payments on both principal and interest.
D.Mauna Loa should borrow both yen 30,000,000 accounts receivable and cash flows to cover its accounting ex
y's with plantations on the slopes of its namesake volcano inHilo, Hawaii, exports macadamia nuts worldwide.
yen to Japanese customers of yen 1,440,000,000. At the present exchange rate of yen 125 /$, this is equivalent to $11,520,000.
00,000 account receivable on Mauna Loa's balance sheet. Credit terms to each customer allow for 60 days before payment is due.
its yenreceipts, but it has too many customers and transactions to make it practical to sell each receivable forward.
s particular purpose. Therefore, they have decided to use a"matching" hedge by borrowing yen. Assume the annual interest rate on the l
only. The interest payment one year hence has already been covered by borrowing both principal and interest upfront.
exposure, not only borrow the cash flows to cover its operating exposure.
ipal and interest.
o cover its accounting exposure and operating exposure at the same time.
ent to $11,520,000.
efore payment is due.
erest upfront.
Question 2 Acuña Leather Goods. DeMagistris FashionCompany, based in New YorkCity, imports leather coats from
When the peso lost its parity with the U.S. dollar in January2002, it collapsed in value to Ps4.0/$ by Oct
Since both DeMagistris andAcuña wanted to continue their longtimerelationship, they agreed on arisk
DeMagistris will pay based on the spot rate. If the exchange rate falls outside thisrange, they will share
at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coat
Assumptions Values
Bottom Top
Exchnage Rate Range 3.5 4.5
Contracted Cost Of Import 7,000,000 1,750,000
a. If the exchange rate changes immediately to Ps7.0/$, what will be the dollar cost of six months of impor
New Exchnage Rate 7.0
b. At Ps7.0/$, what will be the peso export sales ofAcuña Leather Goods to DeMagistris FashionCompany
City, imports leather coats fromAcuña LeatherGoods, a reliable and longtimesupplier, based in BuenosAires, Argentina. Payment is in Arg
sed in value to Ps4.0/$ by October 2002. The outlook was for a further decline in thepeso's value.
tionship, they agreed on arisk-sharing arrangement. As long as the spot rate on the date of an invoice is betweenPs3.5/$ andPs4.5/$,
de thisrange, they will share the difference equally withAcuña Leather Goods. Therisk-sharing agreement will last for sixmonths,
ntracts to import leather coats from Acuña for Ps7,000,000 or $1,750,000 at the current spot rate of Ps4.0/$ during the next six months.
ar cost of six months of imports toDeMagistris? 1217391 Cost Of Imports = (Contracted Cost Of Imports) / (To
etweenPs3.5/$ andPs4.5/$,
nt will last for sixmonths,
/$ during the next six months.
ontracted Cost Of Imports) / (Top Of Exchange Rate Range + (New Exchnage Rate - Top of Exchnage Rate Range) / 2)
Question 3 Manitowoc Crane(A). Manitowoc Crane(U.S.) exports heavy crane equipment to several Chinese dock
The Chinese yuan(renminbi) has been trading at Yuan7.90/$, but a Hong Kong advisory service predicts
Accepting this forecast asgiven, Manitowoc Crane faces a pricing decision in the face of the impending d
in which case Chinese volume will notchange; or(2) maintain the same dollarprice, raise the yuan price
Assumptions Values
Current Sale Volume 10,000
Dollar Price Per Unit 24,000
Current Spot Rate 7.90
Expected Sport Rate 8.60
Change In Unit Volume Caused By Devaluation (Decrease) 10%
Direct Costs Percentage of Sales 75%
a. If Manitowoc Crane maintains the same yuan price and same unitvolume, what will be thefirm's gross
If Manitowoc Crane maintains the same dollarprice, raises the yuan price in China to offset thedevalua
and experiences a10% drop in unitvolume, what will be thefirm's grossprofits?
Drop In Unit Volume 90%
ume, what will be thefirm's grossprofits? 40465116 Gross Profits = Sales Revenue - Dir
rice in China to offset thedevaluation, 54000000 Gross Profits = Sales Revenue - Dir
CASE 2
4,000 each.
main unchanged for at least a decade.
fewerdollars,
Direct costs are75% of the U.S. sales price.
enue = (Dollar Price Per Unit * Current Spot Rate / Expected Spot Rate) * Current Sales Volume
sts = (Dollar price Per Unit * Direct Costs Percentage Of Sales) * Current Unit Volume
enue = Dollar Price Per Unit * (Current Sales Volume * Drop In Unit Volume)
sts = (Dollar price Per Unit * Direct Costs Percentage Of Sales) * (Current Unit Volume * Drop In Unit Volume)
Question 4 Manitowoc Crane(B). Manitowoc Crane(U.S.) exports heavy crane equipment to several Chinese dock
each. The Chinese yuan(renminbi) has been trading at Yuan8.40/$, but a Hong Kong advisory service pr
after which it will remain unchanged for at least a decade. Accepting this forecast asgiven, Manitowoc C
It may either(1) maintain the same yuan price and in effect sell for fewerdollars, in which case Chinese
raise the yuan price in China to offset thedevaluation, and experience a10% drop in unit volume. Direct
dditionally, financial management believes that if it maintains the same yuan salesprice, volume will in
A
At the end of 8years, Manitowoc's patent expires and it will no longer export to China. After the yuan is
If Manitowoc Crane raises the yuan price so as to maintain its dollarprice, volume will increase at only 1
units.Again, dollar costs will notchange, and at the end of eight years Manitowoc Crane will stop expor
Given theseconsiderations, what should beManitowoc's pricingpolicy?
Assumptions Values
Current Sale Volume 14,000
Dollar Price Per Unit (Yuan Equivalent) 23,000
Current Spot Rate 8.40
Expected Sport Rate 9.30
Direct Costs Percentage Of Sales 75%
Change In Unit Volume Caused By Devaluation (Decrease) 10%
Change In Unit Volume With Current Yuan Price (Increase) 10%
Change in Unit Volume With A Chnage In Yuan Price (Increase) 1%
Lower Initial Base Unit 12600
Weighted Average Cost of Capital 15%
a. CASE 1
If Manitowoc Crane maintains the same yuan price and in effect sells for fewerdollars, the annual sales
The direct cost per unit is75% of thesales, or $23,000 * 0.75 = $ 17,250. Calculate the gross profits for y
Case 1 Year 1
Sales Volume in Unit 14,000
Sales Price Per Unit 20774
Total Sales Revenue 290838710
Direct Cost Per Unit 17250
Total Direct Costs 241500000
Gross Profit 49338710
Calculate the gross profits for years 5 through 8 in the followingtable: (Round to the nearestdollar.)
Case 1 Year 5
Sales Volume in Unit 20,497
Sales Price Per Unit 20774
Total Sales Revenue 425816954.839
Direct Cost Per Unit 17250
Total Direct Costs 353580150
Gross Profit 72236805
fManitowoc's weighted average cost of capital is 15%, what is the cumulative present value of thefirm'
(Round to the nearestdollar.)
CASE 2
If Manitowoc Crane maintains the same dollarprice, raises the yuan price in China to offset thedevalua
The direct cost per unit is75% of thesales, or $ 23,000 * 0.75 = $17,250 and the sales volume in year 1 i
(Round to the nearestdollar.)
Case 2 Year 1
Sales Volume in Unit 12,600
Sales Price Per Unit 23000
Total Sales Revenue 289800000
Direct Cost Per Unit 17250
Total Direct Costs 217350000
Gross Profit 72450000
Calculate the gross profits for years 5 through 8 in the followingtable: (Round to the nearestdollar.)
Case 2 Year 5
Sales Volume in Unit 13,112
Sales Price Per Unit 23000
Total Sales Revenue 301567042
Direct Cost Per Unit 17250
Total Direct Costs 226175282
Gross Profit 75391761
fManitowoc's weighted average cost of capital is 15%, what is the cumulative present value of thefirm'
(Round to the nearestdollar.)
uan salesprice, volume will increase at 10% per annum through year eight. Dollar costs will not change.
ort to China. After the yuan is devalued to Yuan9.30/$, no further devaluations are expected.
volume will increase at only 1% per annum through yeareight, starting from the lower initial base of 12,600
nitowoc Crane will stop exporting to China.Manitowoc's weighted average cost of capital is 15%.
werdollars, the annual sales price per unit is equal to ($23,000 * Yuan8.40/$) / Yuan9.30/$ = $20,774.19.
alculate the gross profits for years 1 through 4 in the followingtable: (Round to the nearestdollar.)
Year 2 Year 3 Year 4
15400 16940 18634 Sales Volume (Units) = Current Sales Volume * Change In Uni
20774 20774 20774 Sale Price Per Unit = (Yuan Equivalent * Current Exchnage Rat
319922581 351914839 387106323 Total Sales Revenue = Sales Volume In Unit * Sales Price Per U
17250 17250 17250 Direct Cost Per Unit = (Yuan Equivalent * Direct Cost Percenta
265650000 292215000 321436500 Total Direct Costs = Sales Volume In Unit * Direct Cost per Un
54272581 59699839 65669823 Gross Profit = Total Sales Revenue - Total Direct Costs
n China to offset thedevaluation, and experiences a10% drop in unitvolume, the annual sales price per unit is $23,000.
d the sales volume in year 1 is 14,000 * (1 - 0.10) = 12,600. Calculate the growth profits for years 1 through 4 in the followingtable:
CASE 2
Sales Volume * Change In Unit Volume With Current Yuan Price (Increase)
ivalent * Current Exchnage Rate) / Expected Exchange Rate
ume In Unit * Sales Price Per Unit
uivalent * Direct Cost Percentage of Sales)
me In Unit * Direct Cost per Unit
nue - Total Direct Costs
Sales Volume * Change In Unit Volume With Current Yuan Price (Increase)
ivalent * Current Exchnage Rate) / Expected Exchange Rate
ume In Unit * Sales Price Per Unit
uivalent * Direct Cost Percentage of Sales)
me In Unit * Direct Cost per Unit
nue - Total Direct Costs
K)2+CF1/(1+K)3+CF1/(1+K)4+CF1/(1+K)5+CF1/(1+K)6+CF1/(1+K)7+CF1/(1+K)8
it is $23,000.
h 4 in the followingtable:
Sales Volume * (1 + Change in Unit Volume With A Chnage In Yuan Price (Increase))
Sales Volume * (1 + Change in Unit Volume With A Chnage In Yuan Price (Increase))
K)2+CF1/(1+K)3+CF1/(1+K)4+CF1/(1+K)5+CF1/(1+K)6+CF1/(1+K)7+CF1/(1+K)8
Question 5 Rolls-Royce Turbine Engines. Rolls-Royce is struggling with its pricing strategy with a number of its majo
SinceRolls-Royce is a British company with most manufacturing of the Airbus engines in the UnitedKing
But in the period shown in the popupwindow, 2007 - 2009, the pound steadily weakened against the eu
Rolls-Royce has traditionally denominated its sales contracts with Airbus inAirbus' homecurrency, the e
a. Compute the sales prices per unit of engine in euros for thethree-year period in the followingtable: (Ro
Date 1Q 2007 2Q 2007
Price (Millions of Pounds, £) 22.45 22.45
Spot Rate (Euro = 1.00 Pound) 1.4921 1.4702
Price (Millions Of Euro, €) 33.50 33.01
Assuming eachRolls-Royce engine marketed to Airbus is initially priced at £22.45 millioneach, how has
(Select the bestresponse.)
A.The price of the engine in euros has decreased over thethree-year period due to the appreciation of
B.The price of the engine in euros has increased over thethree-year period due to the appreciation of th
C.The price of the engine in euros has increased over thethree-year period due to the depreciation of th
D.The price of the engine in euros has decreased over thethree-year period due to the depreciation of t
What is the cumulative percentage change in the price of the engine in euros for thetwo-year period? (
A.20.00%
B.-26.21%
C.-11.45%
D.0.00%
c. If the price elasticity of demand forRolls-Royce turbine sales to Airbus is relativelyinelastic, and the pric
what does this price change mean forRolls-Royce's total sales revenue on sales to Airbus of thisengine?
"The appreciation of the euro reduces the cost of Airbus and thus increases the salesvolume,
which in turn increases the total sales revenue forRolls-Royce in spite of the fact that the price of the en
The above statement is TRUE. (Select from thedrop-down menu.)
d. Compare the prices and volumes for the first quarter of each of the three years shown in the table in pa
A.NeitherRolls-Royce nor Airbus.
B.Only Airbus.
C.BothRolls-Royce and Airbus.
D.OnlyRolls-Royce.
egy with a number of its major customers in ContinentalEurope, particularly Airbus.
us engines in the UnitedKingdom, costs are predominantly denominated in British pounds.
adily weakened against the euro.
Airbus' homecurrency, the euro. After completing the table answer the followingquestions:
£22.45 millioneach, how has the price of that engine changed over the period shown when priced in euros at the current spot rate?
1Q 2009 % Change
22.45 0.00% Percentage Change (% Change) = (1Q 2009 - 1Q 2007) / (1Q 2007)
1.1011 -26.20%
24.72 -26.21%
240 20.00%
5,933 -11.45%
5,388 20.00%
elativelyinelastic, and the price of the engine in British pounds never changes over theperiod,
sales to Airbus of thisengine?
s the salesvolume, TRUE
he fact that the price of the engine in British pounds neverchanges."
ears shown in the table in part b above. Who has benefitted the most from the exchange rate changes? (Select the bestresponse.)
* Spot Rate (Euro = 1.00 Pound)
Assumptions
Risk-Free Rate Of Interest
Credit Risk Premium
Domestic Beta
International Beta
Debt
Equity
Expected Rate Of Return (Domestic Investors)
Expected Rate Of Return (Global Investors)
Interest Rate of Debt
Corporate Tax Rate
Values
3.00% where
3.80% ke = Expected (required) rate of return on equity
0.96 krf = Rate of interest onrisk-free bonds
0.72 betaj = Coefficient of systematic risk for the firm(beta)
50% km = Expected (required) rate of return on the market portfolio of stocks
50%
9.10%
8.20%
8.60%
42%
4.99% Kd *(1 - t)
4.99% Kd *(1 - t)
ebt is the same as the domestic cost of debt of 4.90%
Assumptions Values
Risk-Free Rate Of Interest 3.70%
Credit Risk Premium 3.90%
Domestic Beta 1.09
International Beta 0.84
Debt 80%
Equity 20%
Interest Rate of Debt 8.20%
Corporate Tax Rate 42%
a. Using the domesticCAPM, what isGanado's weighted average cost of capital if thefirm's equity risk pre
(Round to two decimalplaces.)
Equity Risk premium 8.30%
STEP 1 Calculate Ganado's cost of Capital
Using theICAPM, what isGanado's weighted average cost of capital if thefirm's equity risk premium is 8
(Round to two decimalplaces.)
Equity Risk premium 8.30%
STEP 1 Calculate Ganado's International cost of equity?
b. Using the domesticCAPM, what isGanado's weighted average cost of capital if thefirm's equity risk pre
(Round to two decimalplaces.)
Equity Risk premium 7.40%
STEP 1 Calculate Ganado's cost of Capital
Using theICAPM, what isGanado's weighted average cost of capital if thefirm's equity risk premium is 7
(Round to two decimalplaces.)
Equity Risk premium 7.40%
STEP 1 Calculate Ganado's International cost of equity?
c. Using the domesticCAPM, what isGanado's weighted average cost of capital if thefirm's equity risk pre
(Round to two decimalplaces.)
Equity Risk premium 5.40%
STEP 1 Calculate Ganado's cost of Capital
Using theICAPM, what isGanado's weighted average cost of capital if thefirm's equity risk premium is 5
( Round to two decimalplaces.)
Equity Risk premium 5.40%
STEP 1 Calculate Ganado's International cost of equity?
d. Using the domesticCAPM, what isGanado's weighted average cost of capital if thefirm's equity risk pre
(Round to two decimalplaces.)
Equity Risk premium 4.30%
STEP 1 Calculate Ganado's cost of Capital
Using theICAPM, what isGanado's weighted average cost of capital if thefirm's equity risk premium is 4
(Round to two decimalplaces.)
Equity Risk premium 4.30%
STEP 1 Calculate Ganado's International cost of equity?
Officer, estimates therisk-free rate to be 3.70%, thecompany's credit risk premium is 3.90%, the domestic beta is estimated at 1.09,
re is now 80% debt. Thebefore-tax cost of debt estimated by observing the current yield onGanado's outstanding bonds combined with
h the CAPM and ICAPM weighted average costs of capital for the following equity risk premium estimates.
where
ke = Expected (required) rate of return on equity
krf = Rate of interest onrisk-free bonds
betaj = Coefficient of systematic risk for the firm(beta)
km = Expected (required) rate of return on the market portfolio of stocks
m's equity risk premium is 8.30%? 5.94% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
if thefirm's equity risk premium is 7.40 %? 6.16% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
m's equity risk premium is 7.40%? 5.79% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
if thefirm's equity risk premium is 5.40 %? 5.72% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
m's equity risk premium is 5.40%? 5.45% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
8.24% keglobal = krfg + Bjg * ( Kmg - krfg)
if thefirm's equity risk premium is 4.30 %? 5.48% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
m's equity risk premium is 4.30%? 5.27% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
Assumptions Values
Cost Of Debt 6.70% where
Risk-Free Rate Of Interest 3.80% ke = Expected (required)
Expected Rate Of Return (Domestic Investors) 8.00% krf = Rate of interest onri
Corporate Tax Rate 30% betaj = Coefficient of system
Debt 60% km = Expected (required) r
Equity 40%
a. IfThunderhorse's beta is estimated at 0.90, what isThunderhorse's weighted average cost ofcapital?
Beta 0.90
STEP 1 Calculate Ganado's cost of Capital
b. IfThunderhorse's beta is estimated at 0.60, significantly lower because of the continuing profit prospect
what isThunderhorse's weighted average cost ofcapital?
Beta 0.60
STEP 1 Calculate Ganado's cost of Capital
of debt is 6.70%, and the10-year U.S. Treasuryyield, the proxy for therisk-free rate ofinterest, is 3.80%.
ctive tax rate is 30%. Its optimal capital structure is 60% debt and 40% equity.
the continuing profit prospects in the global energysector, 5.34% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+
j
* ( Km - krf)
* (E/(E+D)) + Kd * (1 - t) (D/(D+E))
j
* ( Km - krf)
Question 4 Nestlé of Switzerland Revisited. Nestlé of Switzerland is revisiting its cost of equity analysis. As a result of ex
the Swiss bond index yield(10-year maturity) has dropped to a record low of 0.51%. The Swiss equity market
Times global equity marketreturns, indexed back to Swissfrancs, stands at 8.97%. Nestlé's corporate treasur
but its global beta(against the larger global equity marketportfolio) at 0.525.
Assumptions Values
Risk-Free Rate Of Interest 0.51% where
Expected Rate Of Return (Domestic Investors) 8.40% ke = Expected (required) rate o
Expected Rate Of Return (Global Investors) 8.97% krf = Rate of interest onrisk-fre
Domestic Beta 0.935 betaj = Coefficient of systematic
International Beta 0.525 km = Expected (required) rate o
a. What isNestlé's cost of equity based on the domestic portfolio for a Swissinvestor? 7.89%
b. What isNestlé's cost of equity based on a global portfolio for a Swissinvestor? 4.95%
nalysis. As a result of extraordinary actions by the Swiss CentralBank,
The Swiss equity markets have been averaging 8.40% returns, while the Financial
estlé's corporate treasury staff has estimated thecompany's domestic beta at 0.935,
ke = krf + Bj * ( Km - krf)
a. IfCorcovado's beta is estimated at 1.70, what is its weighted average cost ofcapital?
Beta 1.70
STEP 1 Calculate Ganado's cost of Capital
b. IfCorcovado's beta is estimated at 1.40, significantly lower because of the continuing profit prospects in
what is its weighted average cost ofcapital?
Beta 1.40
STEP 1 Calculate Ganado's cost of Capital
00%. Therisk-free rate of interest is 4.00 %. The expected return on the market portfolio is 8.50%.
ebt and 40% equity.
continuing profit prospects in the global pharmasector, 6.64% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))
+ Kd * (1 - t) (D/(D+E))
Question 6 WestGasConveyance, Inc. WestGasConveyance, Inc., is a large U.S. natural gas pipeline company that w
Its corporate combined federal and state income tax rate is 38%. WestGas finds that it can finance in the
Both debt and equity would have to be sold in multiples of$20 million, and these cost figures show the
A London bank advises WestGas that U.S. dollars could be raised in Europe at the followingcosts, also in
Each increment of cost would be influenced by the total amount of capital raised. Thatis, if WestGas firs
additional debt beyond this amount would cost 11% in the United States and 9% in Europe. The same re
Assumptions
Total Expansion Plan
Debt
Equity
Corporate Tax Rate
a. The weighted average cost of capital for the first$40 million of new capital is
FIRST $40,000,000
What is the lowest average cost of capital for the second$40 million of newcapital?
SECOND $40,000,000
What is the lowest average cost of capital for the third$40 million of newcapital?
THIRD $40,000,000
What will be the weighted average cost of capital for the $120 million expansion?
b. If WestGas plans an expansion of only$60 million, what will be the weighted average cost of capital
for the additional$20 million over the first$40 million of newcapital?
c. What will be the weighted average cost of capital for the$60 millionexpansion?
FIRST $20,000,000
SECOND $40,000,000
TOTAL EXPANSION $60,000,000
e U.S. natural gas pipeline company that wants to raise$120 million to finance expansion. WestGas wants a capital structure that is 50% d
%. WestGas finds that it can finance in the domestic U.S. capital market at the rates listed in the popup window:
0 million, and these cost figures show the componentcosts, each, of debt and equity if raised 50% by debt and 50% by equity.
ed in Europe at the followingcosts, also in multiples of$20 million, while maintaining the 50/50 capital structure.
nt of capital raised. Thatis, if WestGas first borrowed$20 million in the European market at 7% and matched this with an additional$20 m
ted States and 9% in Europe. The same relationship holds for equity financing.
Values where
$120,000,000 ke = Expected (required) rate of return on equity
50% krf = Rate of interest onrisk-free bonds
50% betaj = Coefficient of systematic risk for the firm(beta)
38% km = Expected (required) rate of return on the market portfolio of s
e the weighted average cost of capital 10.29% KWACC2 = Ke European * (E/(E+D)) + Kd European * (1 - t
% by equity.
4.88% Kd * (1 - t)
5.07% Kd * (1 - t)
Assumptions
Risk-Free Rate Of Interest
Corporate Tax Rate
Market Risk Premium
Corporate Tax Rate
Beta
Cargill
$114 billion
0.90
AA
6.81%
26%
54%
Question 1 Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a firm b
of interest than what it expected. Using the same baseline values of a debt principal of SF1.7 million, ao
what is the effectiveafter-tax cost of debt for one year for a U.S.dollar-based company if the exchange
Assumptions Values
Debt Principal 1,700,000
Initial Spot Rate 1.5000
Cost of Debt 4.522%
Corporate Tax Rate 32%
a. If the exchange rate at the end of the period was SF1.5000/$, what is the effectiveafter-tax cost ofdebt
Exchange Rate 1.5000
STEP 1 Find the percentage change in the value of the Swiss franc versus the U.S. dollar
STEP 2 Find the total expense using the nominal interest rate and the percentage change in the exchange rate
b. If the exchange rate at the end of the period was SF1.4500/$, what is the effectiveafter-tax cost ofdebt
Exchange Rate 1.4500
STEP 1 Find the percentage change in the value of the Swiss franc versus the U.S. dollar
STEP 2 Find the total expense using the nominal interest rate and the percentage change in the exchange rate
c. If the exchange rate at the end of the period was SF1.3960/$, what is the effectiveafter-tax cost ofdebt
Exchange Rate 1.3960
STEP 1 Find the percentage change in the value of the Swiss franc versus the U.S. dollar
STEP 2 Find the total expense using the nominal interest rate and the percentage change in the exchange rate
c. If the exchange rate at the end of the period was SF1.5920/$, what is the effectiveafter-tax cost ofdebt
Exchange Rate 1.5920
STEP 1 Find the percentage change in the value of the Swiss franc versus the U.S. dollar
STEP 2 Find the total expense using the nominal interest rate and the percentage change in the exchange rate
monstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate
cipal of SF1.7 million, aone-year period, an initial spot rate of SF1.5000/$, a 4.522% cost ofdebt, and a 32% taxrate,
ompany if the exchange rate at the end of the periodwas:
Assumptions Values
Debt Principal 90,000,000
Initial Exchnage Rate 1.3469
Payment Period 3
Interest Rate Per Annum 6.450%
Euro Depreciation 3.50%
a. Complete the following table to calculate the dollar cost of theeuro-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to four decimalplaces.)
Year 0 Year 1
Proceeds From Borrowing euros 90,000,000
Interest Payment due in euros (5805000)
Repayment of principal in 3 years
Total cash flow from eur-denominated debt 90,000,000 (5805000)
What is the effective cost of this loan for McDougan? (Round to two decimalplaces.)
ntpartnership, borrows €90,000,000 at a time when the exchange rate is $1.3469/euro. The entire principal is to be repaid in threeyears
ted to depreciatevis-à-vis the dollar at 3.5% per annum. What is the effective cost of this loan forMcDougan?
minated debt for years 0 through 3. Enter a positive number for a cash inflow and negative for a cash outflow.
o four decimalplaces.)
Year 2 Year 3
1.25427 1.21037 Expected Exchange Rate = Initial Exchnage Rate * (1 - Expected Depreciation)
(7281020) (115959269) Dollar Equivalent of Euro-Denominated Cash Flow = Total Cash Flow of Euro-Denom
- Expected Depreciation)
R)2 + (CF3)/(1+IRR)3
Question 3 Morning Star Air(China). Morning StarAir, headquartered inKunming, China, needs US$28,000,000 for
Assumptions Values
Debt Principal 28,000,000
Eurodollars Interest Rate Per Annum 7.15%
Hong Kong Dollar 222,734,400
Hong Kong Interest Rate Per Annum 6.90%
Present Exchange Rate (HK/$) 7.9548
a. At what ending exchange rate would Morning Star Air be indifferent between borrowing U.S. dollars and
STEP 1 Find the cost of repaying the loan inUS$ in one year
STEP 2 Find the cost of repaying the loan inHK$ in one year
, needs US$28,000,000 for one year to finance working capital. The airline has two alternatives forborrowing:
borrowing U.S. dollars and borrowing Hong Kong dollars? 7.9362 S1 = HK$ / US$
The value of a note is the total present value of all its future cash flows discounted at thefirm's cost of c
(Round the cash flows to the nearest cent and the discount factor to four decimalpalces.)
Assumptions Values
Note Sold Par Value 1,000
Coupon Rate 7%
Coupon Payment Period 2
Date Since
Previous Payment
Cash Payment (Payment Date) Date
First Coupon (30 June 2011) 122
Second Coupon (31 December 2011) 180
Third Coupon (30 June 2012) 180
Fourth Coupon (31 December 2012) 180
Fifth Coupon (30 June 2013) 180
Six Coupon and Final Coupon (31 December 2013) 62
Principal Repayment (31 December 2013) 62
Total Present Value
medium-term euronote with the followingcharacteristics, how much in dollars will Pantheon receive for each $1,000 notesold?
ws discounted at thefirm's cost of capital. The value of themedium-term euronote can be calculated in the followingtable:
four decimalpalces.)
owingtable:
ue * (Annual Coupon Rate / 2) * (Days Since The Previous Payment Date / 180)
+ (Annual Coupon Rate / 2))^ (Cumulative Days Since Previous Payment Date/180)
Assumptions Values
Debt Principal 550,000,000
Basic Points 0.008
Up-Front Fees (Principal) 1.50%
First 6-Month LIBOR 4.40%
Second 6-Month LIBOR 4.60%
a. The effective interest cost for the first year is %. (Round to two decimalplaces.)
550,000,000 via a syndicated eurocredit for six years at 80 basis points over LIBOR.
ovided by a syndicate of eight leading investment bankers, which will chargeup-front fees totaling 1.5%
year if the annual LIBOR is 4.40 % during the first six months and 4.60% during the second six months.
5.38% Effective Interest Cost = Principal * ((LIBOR1 + Basic Point)/ 2) + ((LIBOR2 + Basic Point) / 2) / (Pri
((LIBOR2 + Basic Point) / 2) / (Principal * (1 - Up-Front Fee))
Question 6 Adamantine Architectonics. Adamantine Architectonics consists of a U.S. parent and wholly owned sub
translated into U.S.dollars, are shown in the popupwindow, What are the debt and equity proportions
a. What is the debt proportion inAdamantine's consolidated balancesheet? (Round to two decimalplace
Retain Earnings
= Long-Term Debt In Ringgits / Exchange Rate
Long-Term Debt In Pesos / Exchange Rate
+ Mexico Debt
Question 7 Grupo Modelo S.A.B. de C.V. GrupoModelo, a brewery out of Mexico that exports suchwell-known var
However, the company evaluates all businessresults, including financingcosts, in U.S. dollars. The comp
For allissues, interest is payable once peryear, at the end of the year. Available alternatives are asfollo
a. Sell Japanese yen bonds at par yielding 3.30% per annum. The current exchange rate is ¥106.00/$, and t
What is the effective cost of theyen-denominated loan for GrupoModelo?
b. Selleuro-denominated bonds at par yielding 6.90% per annum. The current exchange rate is $1.1930/eu
What is the effective cost of theeuro-denominated loan for GrupoModelo?
c. Sell U.S. dollar bonds at par yielding 5.20% per annum. What is the effective cost of thedollar-denomina
d. Which course of action do you recommend Grupo Modelo take andwhy?
Assumptions Values
Debt Principal 10,000,000
Japanese Bonds At par 3.30%
Current Exchange Rate (¥/$) 106.00
Yen Appreciation 2.3%
Euro Bonds At Par 6.90%
Current Exchange Rate ($/€) 1.1930
Euro Depreciation 2.2%
U.S. Dollar Bonds At Par 5.20%
a. Complete the following table to calculate the dollar cost of theyen-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to two decimalplaces.)
b. Complete the following table to calculate the dollar cost of theeuro-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to four decimalplaces.)
c. Complete the following table to calculate the dollar cost of thedollar-denominated debt for years 0 thro
(Round the amount to the nearest whole number and the exchange rate to two decimalplaces.)
d. Which course of action do you recommend Grupo Modelo take and why? (Select from the drop-down
Given the expected exchange ratechanges, the euro-denominated bonds have the lowestall-in-cost of
hat exports suchwell-known varieties asCorona, Modelo, andPacifico, is Mexican by incorporation.
gcosts, in U.S. dollars. The company needs to borrow $10,000,000 or the foreign currency equivalent for four years.
vailable alternatives are asfollows:
xchange rate is ¥106.00/$, and the yen is expected to strengthen against the dollar by 2.3% per annum.
rent exchange rate is $1.1930/euro, and the euro is expected to weaken against the dollar by 2.2% per annum.
ominated debt for years 0 through 4. Enter a positive number for a cash inflow and a negative number for a cash outflow.
te to two decimalplaces.)
Year 3 Year 4 Principal Proceeds in japanese Yen = Principal * Current Exchange Rate
(34980000) (1094980000) Annual Interest Payment = -Principal Proceeds in Japanese Yen * Yield On
99.01 96.78 Expected Exchange Rate = Currect Exchange Rate / (1 + Yen Appreciation)
-353298 -11313653 Dollar Equivalent Of Yen-denominated Cash Flow = Total Cash Flow of Yen
5.68%
$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
nominated debt for years 0 through 4. Enter a positive number for a cash inflow and a negative number for a cash outflow.
te to four decimalplaces.)
1.1160 1.0914 Expected Exchange Rate = Currect Exchange Rate / (1 - Euro Depreciation)
-645455 -9779871 Dollar Equivalent Of Euro-denominated Cash Flow = Total Cash Flow of Eu
4.55% IRR = IRR (Cash Flow in $)
$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
enominated debt for years 0 through 4. Enter a positive number for a cash inflow and a negative number for a cash outflow.
te to two decimalplaces.)
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
or a cash outflow.
ash Flow = Total Cash Flow of Euro-denominated debt * Expected Exchange Rate
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
Question 8 Grupo Modelo S.A.B. de C.V. GrupoModelo, a brewery out of Mexico that exports suchwell-known var
However, the company evaluates all businessresults, including financingcosts, in U.S. dollars. The comp
For allissues, interest is payable once peryear, at the end of the year. Available alternatives are asfollo
a. Sell Japanese yen bonds at par yielding 3.00% per annum. The current exchange rate is ¥106.00/$, and t
What is the effective cost of theyen-denominated loan for GrupoModelo?
b. Selleuro-denominated bonds at par yielding 7.00% per annum. The current exchange rate is $1.1960/eu
What is the effective cost of theeuro-denominated loan for GrupoModelo?
c. Sell U.S. dollar bonds at par yielding 5.00% per annum. What is the effective cost of thedollar-denomina
d. Which course of action do you recommend Grupo Modelo take andwhy?
Assumptions Values
Debt Principal 10,000,000
Japanese Bonds At par 3.00%
Current Exchange Rate (¥/$) 106.00
Yen Appreciation 2.0%
Euro Bonds At Par 7.00%
Current Exchange Rate ($/€) 1.1960
Euro Depreciation 2.0%
U.S. Dollar Bonds At Par 5.00%
a. Complete the following table to calculate the dollar cost of theyen-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to two decimalplaces.)
b. Complete the following table to calculate the dollar cost of theeuro-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to four decimalplaces.)
c. Complete the following table to calculate the dollar cost of thedollar-denominated debt for years 0 thro
(Round the amount to the nearest whole number and the exchange rate to two decimalplaces.)
d. Which course of action do you recommend Grupo Modelo take and why? (Select from the drop-down
Given the expected exchange ratechanges, the euro-denominated bonds have the lowestall-in-cost of
hat exports suchwell-known varieties asCorona, Modelo, andPacifico, is Mexican by incorporation.
gcosts, in U.S. dollars. The company needs to borrow $10,000,000 or the foreign currency equivalent for four years.
vailable alternatives are asfollows:
xchange rate is ¥106.00/$, and the yen is expected to strengthen against the dollar by 2.30% per annum.
rent exchange rate is $1.1960/euro, and the euro is expected to weaken against the dollar by 2.0% per annum.
ominated debt for years 0 through 4. Enter a positive number for a cash inflow and a negative number for a cash outflow.
te to two decimalplaces.)
Year 3 Year 4 Principal Proceeds in japanese Yen = Principal * Current Exchange Rate
(31800000) (1091800000) Annual Interest Payment = -Principal Proceeds in Japanese Yen * Yield On
99.89 97.93 Expected Exchange Rate = Currect Exchange Rate / (1 + Yen Appreciation)
-318362 -11149051 Dollar Equivalent Of Yen-denominated Cash Flow = Total Cash Flow of Yen
5.06%
$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
nominated debt for years 0 through 4. Enter a positive number for a cash inflow and a negative number for a cash outflow.
te to four decimalplaces.)
1.1257 1.1032 Expected Exchange Rate = Currect Exchange Rate / (1 - Euro Depreciation)
-658834 -9869339 Dollar Equivalent Of Euro-denominated Cash Flow = Total Cash Flow of Eu
4.86% IRR = IRR (Cash Flow in $)
$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
enominated debt for years 0 through 4. Enter a positive number for a cash inflow and a negative number for a cash outflow.
te to two decimalplaces.)
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
or a cash outflow.
ash Flow = Total Cash Flow of Euro-denominated debt * Expected Exchange Rate
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
Question 1 Avon's Foreign-Source Income. Avon is aU.S.-based direct seller of a wide array of products. Avon mar
it has its interns build a spreadsheet analysis of the following hypothetical subsidiaryearnings/distributi
a. What is the total taxpayment, foreign and domesticcombined, for thisincome? (Round to the nearest
b. What is the effective tax rate paid on this income by theU.S.-based parentcompany? (Round to one de
c. What would be the total tax payment if the foreign corporate tax rate was 42% and there were no with
What would be the effective tax rate if the foreign corporate tax rate was 42% and there were no withh
d. What would be the total tax payment if the income was earned by a branch of the U.S.corporation? (R
What would be the effective tax rate if the income was earned by a branch of the U.S.corporation? (Ro
ray of products. Avon markets leadingbeauty, fashion, and home products in more than 100 countries. As part of the training in its corpor
bsidiaryearnings/distribution analysis. Use the tax analysis presented in the popup window for your basicstructure,
% and there were no withholding taxes ondividends? (Round to the nearestdollar.) 1512000
% and there were no withholding taxes ondividends? (Round to one decimalplace.) 42.0%
Total tax Payment = tentative U.S. Liability + Excess Foreign tax Credit
Total tax Payment = tentative U.S. Liability + Excess Foreign tax Credit
a. Calculate the net income available for distribution by the Hong Kong subsidiary for the years 2011-2014
b. What is the expected amount of the dividend to be remitted to the U.S. parent eachyear? (Round to th
c. After estimating the theoretical U.S. tax liability on the expected dividend(what is often termedgross-u
d. What is the effective tax rate on thisforeign-sourced income peryear? (Round to one decimalplace.)
y for the years 2011-2014 in the following table. (Round to the nearestdollar.)
t eachyear? (Round to the nearestdollar.)
at is often termedgross-up in theU.S.), what is the total dividend aftertax, including all Hong Kong and U.S.taxes, expected eachyear? (R
d to one decimalplace.)
2013 2014
$14,000 $16,000
$1,400.00 $1,600.00
$12,600 $14,400
$2,079 $2,376
$10,521 $12,024
$6,839 $7,816
$0 $0
$6,839 $7,816
$1,351 $1,544
$0 $0
$8,190 $9,360
(3,276) (3,744)
(1,351) (1,544)
(1,925) (2,200)
$4,914 $5,616
3276 3744
$8,190 $9,360
40.0% 40.0%
ong-term planning report for the parent company in SanFrancisco,
g imposes no withholding taxes on dividends remitted to U.S. investors
a. If Kraftstoff planned to distribute50% of its netincome, what would be its total net income and total co
b. If Kraftstoff was attempting to choose between a40% and60% payout rate tostockholders, what argum
What arguments and values would management use in order to convince stockholders which of the tw
Kraftstoff should choose the 60% payout rate because it will result in higher totalafter-tax netincome,
hat manufactures electronicfuel-injection carburetor assemblies for several large automobile companies inGermany, includingMercedes
ial policies in line with the increasing degree of disclosure required by firms if they wish to list their shares publicly in or out of Germany.
me tax code applies a different income tax rate to income depending on whether it is retained (40%) or distributed to stockholders (30%).
ould be its total net income and total corporate taxbills? (Round to the nearest wholeeuro.)
50% Payout
485000000
(145,500,000)
$339,500,000
$169,750,000
$0
$169,750,000
$169,750,000
(16,975,000)
$152,775,000
322,525,000
$162,475,000
payout rate tostockholders, what arguments and values would management use in order to convince stockholders which of the two payo
40% Payout
485000000
(145,500,000)
$339,500,000
$135,800,000
$0
$135,800,000
$203,700,000
(20,370,000)
$183,330,000
319,130,000
$165,870,000
60% Payout
485000000
(145,500,000)
$339,500,000
$203,700,000
$0
$203,700,000
$135,800,000
(13,580,000)
$122,220,000
325,920,000
$159,080,000
convince stockholders which of the two payouts is in everyone's bestinterest? (Select from thedrop-down menu.)
ult in higher totalafter-tax netincome, lower total income taxes for thefirm, and higher dividend income for the stockholders.
ermany, includingMercedes, BMW, and Opel.
licly in or out of Germany.
uted to stockholders (30%).
a. If Maria Gamboa assumes a 50% payout rate from eachsubsidiary, calculate the additional taxes due o
(Round to the nearestdollar.)
b. Keeping the payout rate from the Belize subsidiary at 40%, how should Maria change the payout rate o
Maria should increase the payout rate for the Costa Rican subsidiary to equate thecross-credits with th
c. What is the minimum effective tax rate that Maria can achieve on herforeign-sourced income? (Select
The minimum effective tax rate Maria can reach on herforeign-sourced income, assuming something is
ed retailer of specialty fruits and vegetables. The firm is vertically integrated with fruit andvegetable-sourcing subsidiaries in CentralAme
ns of the United States.Gamboa's two Central American subsidiaries are in Belize and Costa Rica.
over thefirm's financial management in the near future.
sophistication in financial management simply out of time and cost considerations.
some specialized knowledge of U.S. taxation practices to work to save Gamboa money.
o Central American subsidiaries. As shown in the popup window, Costa Rican operations are slightly more profitable thanBelize,
ta Rican corporate taxes are a flat30%, and there are no withholding taxes imposed on dividends paid by foreign firms with operations the
olding tax on all dividends distributed to foreign investors. The current U.S. corporate income tax rate is 35%.
the additional taxes due or excess foreign tax credits onforeign-sourced income from Belize individually in the followingtable:
$630,000 $954,000
$0
$270,000 Proportion Of Foreign Income Taxes = EBT * Foreign Corporate Income Tax Ra
$900,000 $1,500,000
$315,000 $525,000
$270,000 $546,000
$45,000 $0
$0 $21,000
change the payout rate of the Costa Rican subsidiary in order to most efficiently manage her total foreign tax bill? (Select from thedrop-
te thecross-credits with the U.S. parent company level and no additional U.S. taxes are due on the remittance and repatriation.
ble thanBelize,
firms with operations there.
ollowingtable:
a. Calculate the profits of Chinglish Dirk and TorringtonEdge, and the consolidated results ofboth, if the m
(Round to the nearest Britishpound.)
Income Statement
Sales Price 3000 $57,600,000
Less Total Costs 3000 ($48,000,000)
Taxable Income $9,600,000
Less Taxes 18.0% ($1,728,000)
Profit, After-Tax $7,872,000
What is the impact of this repositioning on consolidatedafter-tax profit and total taxpayments? (Selec
By increasing the markup in HongKong, the company has reduced its consolidated income taxes and re
ng) exports razor blades to its wholly owned parentcompany, Torrington Edge(Great Britain). Hong Kong tax rates are 20% and British ta
0 units. Chinglish calculates its profit per container as follows(all values in Britishpounds):.
ering repositioning profits within the multinational company.
orringtonEdge, and the consolidated results ofboth, if the markup at Chinglish was increased to20% and the markup at Torrington was re
atedafter-tax profit and total taxpayments?
nEdge, and the consolidated results ofboth, if the markup at Chinglish was increased to20% and the markup at Torrington was reduced t
Income Statement
Sales Price 3000 $66,660,000
Less Total Costs 3000 ($60,600,000)
Taxable Income $6,060,000
Less Taxes 33.0% ($1,999,800) $3,727,800
Profit, After-Tax $4,060,200 $11,932,200
nt in Hong Kong.
Question 6 Chinglish Dirk(B). Chinglish Dirk Company(Hong Kong) exports razor blades to its wholly owned parent
The markup was15% and the sales volume was 3,000 units. Chinglish calculates its profit per container
Corporate management of Torrington Edge wishes to reposition profit in Hong Kong. Itis, however, fac
Secondly, the British tax authorities - in working with TorringtonEdge's cost accounting staff - has estab
Prove that the optimal combination of markups is a25.0% markup at Chinglish and an8.1% markup in T
a. Calculate the profits of Chinglish Dirk and TorringtonEdge, and the consolidated results ofboth, if the m
(Round to the nearest cent.)
Income Statement
Sales Price 3000 $52,500,000
Less Total Costs 3000 ($42,000,000)
Taxable Income 10500000
Less Taxes 16.0% ($1,680,000)
Profit, After-Tax $8,820,000
What is the impact of this repositioning on consolidatedafter-tax profits and total taxpayments?
With the optimal combination of a25.0% markup in HongKong, resulting in a transfer price of £17,500
The statement above is true. (Select from thedrop-down menu.)
ng) exports razor blades to its wholly owned parentcompany, Torrington Edge(Great Britain). Hong Kong tax rates are 16% and British ta
0 units. Chinglish calculates its profit per container as follows(all values in Britishpounds):
o reposition profit in Hong Kong. Itis, however, facing two constraints.First, the final sales price in Great Britain must be£20,000 or less t
h TorringtonEdge's cost accounting staff - has established a maximum transfer price allowed(from HongKong) of£17,800.
25.0% markup at Chinglish and an8.1% markup in Torrington Edge. What is the impact of this repositioning on consolidatedafter-tax profi
nEdge, and the consolidated results ofboth, if the markup at Chinglish was increased to25.0% and the markup at Torrington was reduced
Income Statement
Sales Price 3000 $59,995,500
Less Total Costs 3000 ($55,500,000)
Taxable Income $4,495,500
Less Taxes 32.0% ($1,438,560) $3,118,560
Profit, After-Tax $3,056,940 $11,876,940
Assumptions Values
Face amount of sale 705,000
Maturity, days 4 30 120
Trade acceptance fee, per annum 1.400%
Discount rate on sale of acceptance, per annum 3.800%
Trade Acceptance
Face amount of the receivable 705,000
Less trade acceptance fee (3290.00)
Less discount on the sale acceptance (8930.00)
Net proceeds 692780.00
5.292% Annualized Percentage All-In-Cost (AIC) = (Acceptance Fee + Discount / Amount Received) *
acceptance from Telecom España Acceptance.
euros of this method of tradefinancing?
Assumptions Values
Face amount of sale 718,000.00
Maturity, days 4 30 120
Spot exchange rate, $/€ 1.03
Forward exchange rate, 4-months, $/€ 1.05
Trade acceptance fee, per annum 1.400%
Discount rate on sale of acceptance, per annum 4.200%
a. What are the U.S. dollar net proceeds received at once from the discounted trade acceptance in alterna
Calculate the U.S. dollar proceeds received atonce: (Round to two decimalplaces.)
Trade Acceptance
Face amount of the receivable 718,000.00
Less trade acceptance fee (3350.67)
Euro proceeds 714649.33
Spot exchange rate, $/€ 1.03
U.S. dollar proceeds, now 736088.81
b. What are the U.S. dollar net proceeds received in four months in alternative2?
Forward Proceeds
Face amount of the receivable 718,000.00
Less trade acceptance fee (3350.67)
Euro proceeds 714649.33
Forward exchange rate, $/€ 1.05
U.S. dollar proceeds, four months from now 750381.80
c. What is thebreak-even investment rate that would equalize the net U.S. dollar proceeds from bothalte
d. Which alternative should Nikken Microsystemschoose? (Select all the choices thatapply.)
A. If NikkenMicrosystems' opportunity cost of capital is equal to thebreak-even investmentrate, it sh
B. If NikkenMicrosystems' opportunity cost of capital is less than thebreak-even investmentrate, it sho
C. Selling the acceptance atonce, alternative1, improvesNikken's liquidity and removes the debt that
D. Selling the acceptance in 120 days, alternative2, improvesNikken's liquidity and removes the debt th
t servers to TelecomEspaña for 718,000. Payment is due in four months and will be made with a trade acceptance from Telecom España A
his acceptance will be sold at a 4.2% per annum discount. Also assume that Nikken Microsystems prefers to receive U.S. dollars rather than
eptance for euros at once and convert the euros immediately to U.S. dollars at the spot rate of exchange of $1.03/€ or 2) hold the euro ac
r dollars at the 4-month forward rate of $1.05/€ .
ed trade acceptance in alternative 1? The trade acceptance fee is. (Round to two decimalplaces.)
oices thatapply.)
eak-even investmentrate, it should be indifferent financially between the two alternatives.
ak-even investmentrate, it should be indifferent financially between the two alternatives.
dity and removes the debt that otherwise would be financing the acceptance from NikkenMicrosystem's balance sheet.
uidity and removes the debt that otherwise would be financing the acceptance from Nikken Microsystem's balance sheet.
ce from Telecom España Acceptance.
ive U.S. dollars rather than euros
03/€ or 2) hold the euro acceptance
Assumptions Values
Value of shippment 3,030,000
Credit terms, days 5 30 150
Bankers acceptance fee 1.790%
Motoguzzie WACC, per annum 9.300%
e Fee * (Days/360)
Assumptions Values
Value of shippment 3,090,000
Credit terms, days 7 30 210
Bankers acceptance fee 1.720%
Motoguzzie WACC, per annum 9.300%
Discount rate on sale of acceptance, per annum 5.700%
7.756% Annualized Percentage All-In-Cost (AIC) = (Acceptance Fee + Discount / Amount Received) * (
,090,000 of merchandise from Motoguzzie,
average cost of capital of 9.3%.
3,090,000 Australianreceivable?
(Days/360)
Assumptions Values
Face amount of sale 208,000.00
Down payment, 20% of payment 41600.00
Period for financing, days 6 30 180
Trade acceptance fee 2.100%
Discount rate on sale of acceptance, per annum 3.500%
Trade Acceptance
Face amount of sale 208,000.00
Less cash down-payment (41600.00)
Amount for financing 166400.00
Less trade acceptance fee (1747.20)
Less discount for the period (2912.00)
Proceeds to Nakatomi Toyota 161740.80
b. What areNakatomi's net cashproceeds, including the cash downpayment? (Round to three decimalplaces.)
S.), and sells them to U.S. customers. One of its customers isEcoHire, a car rental firm that buys cars from Nakatomi Toyota at a wholesale
ht $208,000 worth of cars fromNakatomi, with a cash down payment of $41,600 and the balance due in six months without any interest
cceptance for a 2.1% fee, and then sell it at a 3.5% per annum discount to Wells Fargo Bank.
d to three decimalplaces.) 5.761% Annualized Percentage All-In-Cost (AIC) = (Acceptance Fee + Discount
nt? (Round to three decimalplaces.) 203,340.80 Net Cash Proceeds = Down Payment + Proceeds Of Acceptance
katomi Toyota at a wholesale price.
months without any interest charged as a sales incentive.
Down Payment
ceeds Of Acceptance
Question 6 Forfaiting at Umaru Oil(Nigeria). Umaru Oil of Nigeria has purchased $1,280,000 of oil drilling equipme
Umaru Oil must pay for this purchase over the next five years at a rate of $ 256,000 per year due on Ma
has agreed to buy the five notes of $256,000 each at a discount. The discount rate would be approximat
paid by Umaru Oil. Bank of Zurich would also charge Umaru Oil an additional commitment fee of 1.9% p
issued in accordance with the financing contract. The $256,000 promissory notes will come due on Mar
Lagos CityBank, for a 1.2% fee and delivered to Gunslinger Drilling. At thispoint, Gunslinger Drilling will
Bank ofZurich, receiving the full $256,000 principal amount. Bank of Zurich will sell the notes by redisco
Atmaturity, the investors holding the notes will present them for collection at Lagos City Bank. If Lagos
Assumptions
Face amount of the note due March 1 issued by Umaru
3-yea LIBOR rate, per annum
Basic point spread, per annum 200 100
Total discount rate, per annum
Bank of Zurich commitment fee, per annum
Lagos City Bank endorsement fee, per annum
a. What is the annualized percentageall-in cost to Umaru Oil of financing the first $256,000 note due Mar
Calculate total interest and feesbelow: (Round to the nearestdollar.)
b. What might motivate Umaru Oil to use this relatively expensive alternative forfinancing? (Select from t
Umaru Oil would probably be motivated to use a forfaiter because its credit rating is too low to qualify f
annual costs are paid by Umaru Oil itself - the importer, rather than by UnicornDrilling, the exporter.
280,000 of oil drilling equipment from Gunslinger Drilling ofHouston, Texas.
$ 256,000 per year due on March 1 of each year. Bank of Zurich, a Swissforfaiter,
ount rate would be approximately 8.2% per annum based on the expected 3-year LIBOR rate plus 200 basispoints,
nal commitment fee of 1.9% per annum from the date of its commitment to finance until receipt of the actual discounted notes
ry notes will come due on March 1 in successive years. The promissory notes issued by Umaru Oil will be endorsed by their bank,
spoint, Gunslinger Drilling will endorse the notes without recourse and discount them with theforfaiter,
ch will sell the notes by rediscounting them to investors in the international money market without recourse.
on at Lagos City Bank. If Lagos City Bank defaults on payment, the investors will collect on the notes from Bank of Zurich.
Values
256,000.00
6.200%
2.000%
8.200%
1.900%
1.200%
(3072.00)
(4864.00)
(20992.00)
28928.00
11.300% Annualized Percentage All-In-Cost (AIC) = (Total Interest and Fees / Face Amount Of Note)
m Bank of Zurich.
Assumptions
Face value of the shippment
L/C specification on payment after acceptance (days)
Southampton Footware WACC (per annum)
Bankers acceptance discount rate, 150-day maturity (per annum)
Commission for sale of bankers acceptance
a. Would Swishing Shoe Company gain by holding the acceptance tomaturity, as compared to discounting theba
Alternative1: If Southampton Footware holds the draft for 90 days after the bank has acceptedit, Swishing Fo
The present value of £397,000 received 120 dayshence, discounted atSwishing's WACC is. (Round to two dec
Alternative2: Swishing Shoes can sell thebankers' acceptance intoday's London money market ata(n) 12.3%
The discount on the sale of acceptance is. (Round to two decimalplaces.)
b. Does Swishing Shoe Company incur any other risks in thistransaction? (Select all the choices thatapply.)
A. In this transaction Swishing has assumed the foreign exchange transactionrisk; thatis, the risk that the poun
In part this risk is a function of the time that Swisher must wait to exchange the pounds sterling for dollars.
B. In this transaction Swishing has assumed the foreign exchange transactionrisk; thatis, the risk that the po
In part this risk is a function of the time that Swisher must wait to exchange the pounds sterling for dollars.
C. If Swishing discounts thebankers' acceptance at the time ofsale, it receives dollars at once at the exchange
Swisher assumes the added risk that the exchange rate will improve between the time of sale and the time of c
dollars in 120 days.)
D. If Swishing discounts thebankers' acceptance at the time ofsale, it receives dollars at once at the exchang
Swisher assumes the added risk that the exchange rate will deteriorate between the time of sale and the tim
dollars in 120 days.)
c. Assume that Great Britain charges an import duty of 9.8 % on shoes imported into the United Kingdom. Swishi
(Select all the choices thatapply.)
A. If Swishing shifts manufacturing to Ireland from NorthCarolina, it avoids the 9.8% import duty and the dis
B. Alternatively, Swishing would avoid waiting 120 days for its cash and undertaking the associated translatio
C. Note that the solution above in which Swishing found it advantageous to wait 120 days for the cash is uniq
A week or a month later discount rates might change and the alternative
Note that the solution above in which Swishing found it advantageous to sell thebanker's acceptance intoday
A week or a month later discount rates might change and the alternative would then be preferable.
What factors should Swishing consider in deciding to continue to export shoes from North Carolina versus man
All the factors below should be considerexcept: (Select the best choicebelow.)
A. Factor 3.
B. Factor 3 and 6.
C. Factor 7.
D. None of the above.
If Swishing decides to open a plant and manufacture inIreland, the following factors must beconsidered:
1. Corporate income tax rates in Ireland and the United States.
2. Present and possible future changes in shipping costs.(If Swishing had been using air freight before the terro
it might encounter a sharp rise in air freight rates afterward. Terrorists attacks and their aftermath can not be e
but success of a foreign manufacturing venture versus exporting must consider the possibility of any kind of un
3. Expected production volume in Ireland relative to the designed manufacturing capacity of the new factory th
The cost of manufacturing shoes in Ireland will depend both on the volume for which that plant is designed and
4. The cost of labor and material inIreland, versus NorthCarolina; and the availability and level of education of
5. Theexistence, ornonexistence, of excess capacity in the North Carolinafactory, both at present and in term
6. The political risk of investing in Ireland for the Britishmarket, should the type of political terrorism andanti-
7. The possibility that valuable technology of a proprietary nature would be stolen.(This might seem unlikely in
Such a list as above cannot possibly identify all the subjective factors that might go into a decision to invest r
as received an order for 51,000 cartons of athletic shoes from SouthamptonFootware, Ltd., ofEngland, payment to be in British pounds st
redit issued by a London bank on behalf of Southampton Footware. The letter of credit specifies that the face value of the shipment, £397
Footware in accordance with the terms of the letter of credit. The current discount rate in London on 120-day bankers' acceptances is 12.
2% per annum. The commission for selling abankrs' acceptance in the discount market is 2.1% of the face amount.
Values
397,000
120
17.200%
12.300%
2.100%
oney market ata(n) 12.3% per annum discount. 16277.00 Discount On Sale = Face
e choices thatapply.)
hatis, the risk that the pounds sterling to be received from the export will be worth more dollars when received.
nds sterling for dollars.
thatis, the risk that the pounds sterling to be received from the export will be worth fewer dollars when received.
unds sterling for dollars.
rs at once at the exchange rate then in effect. If Swishing waits 120 days to receive the pounds sterling,
me of sale and the time of collection. (Of course, Swishing might gain if the pound would buymore, rather thanless,
ars at once at the exchange rate then in effect. If Swishing waits 120 days to receive the poundssterling,
he time of sale and the time of collection.(Of course, Swishing might gain if the pound would buymore, rather thanless,
he United Kingdom. Swishing Shoe Company discovers that it can manufacture shoes in Ireland and import them into Britain free of any im
% import duty and the discount on suchbanker's acceptances as it now might be incurring.
ng the associated translation risk.
20 days for the cash is unique to that moment in time. would then be preferable.
nker's acceptance intoday's London money market is unique to that moment in time.
n be preferable.
s must beconsidered:
air freight before the terrorist attack on the Twin Towers in New York and the Pentagon,
heir aftermath can not be easily predicted,
possibility of any kind of unpredictable structural changes.)
pacity of the new factory there.
h that plant is designed and the percent of capacity expected to be used in the near future.
ty and level of education of potential workers.
oth at present and in terms of expected future growth.
olitical terrorism andanti-British feelings currently in Northern Ireland spread to the Republic of Ireland itself.
This might seem unlikely in the Irish Britishcontext, but for other countries it could be a significantfactor.)
into a decision to invest rather thanexport, but it provides a starting point for consideration of the global strategy of a firm.
to be in British pounds sterling.
ue of the shipment, £397,000,
nkers' acceptances is 12.3% perannum,
tegy of a firm.
Question 8 Swishing Shoe Company(B). Swishing Shoe Company ofDurham, NorthCarolina, has received an order fo
The shoes will be shipped to Southampton Footware under the terms of a letter of credit issued by a Londo
will be paid 120 days after the London bank accepts a draft drawn by Southampton Footware in accordanc
and Southampton Footware estimates its weighted average cost of capital to be 18% per annum. The com
Assumptions
Face value of the shippment
L/C specification on payment after acceptance (days)
Southampton Footware WACC (per annum)
Bankers acceptance discount rate, 150-day maturity (per annum)
Commission for sale of bankers acceptance
a. Would Swishing Shoe Company gain by holding the acceptance tomaturity, as compared to discounting th
Alternative1: If Southampton Footware holds the draft for 120 days after the bank has acceptedit, Swishi
The present value of £400,000 received 120 dayshence, discounted atSwishing's WACC is. (Round to two
Alternative2: Swishing Shoes can sell thebankers' acceptance intoday's London money market ata(n) 12
The discount on the sale of acceptance is. (Round to two decimalplaces.)
b. Does Swishing Shoe Company incur any other risks in thistransaction? (Select all the choices thatapply.)
A. In this transaction Swishing has assumed the foreign exchange transactionrisk; thatis, the risk that the
In part this risk is a function of the time that Swisher must wait to exchange the pounds sterling for dollars
B. In this transaction Swishing has assumed the foreign exchange transactionrisk; thatis, the risk that th
In part this risk is a function of the time that Swisher must wait to exchange the pounds sterling for dolla
C. If Swishing discounts thebankers' acceptance at the time ofsale, it receives dollars at once at the excha
Swisher assumes the added risk that the exchange rate will improve between the time of sale and the time
dollars in 120 days.)
D. If Swishing discounts thebankers' acceptance at the time ofsale, it receives dollars at once at the exch
Swisher assumes the added risk that the exchange rate will deteriorate between the time of sale and the
dollars in 120 days.)
c. Assume that Great Britain charges an import duty of 10 % on shoes imported into the United Kingdom. Sw
(Select all the choices thatapply.)
A. If Swishing shifts manufacturing to Ireland from NorthCarolina, it avoids the 10 % import duty and the
B. Alternatively, Swishing would avoid waiting 120 days for its cash and undertaking the associated trans
C. Note that the solution above in which Swishing found it advantageous to sell thebanker's acceptance in
A week or a month later discount rates might change and the alternative would then be preferable.
D. Note that the solution above in which Swishing found it advantageous to wait 120 days for the cash is
A week or a month later discount rates might change and the alternative would then be preferable.
What factors should Swishing consider in deciding to continue to export shoes from North Carolina versus
All the factors below should be considerexcept: (Select the best choicebelow.)
A. Factor 3.
B. Factor 3 and 6.
C. Factor 7.
D. None of the above.
If Swishing decides to open a plant and manufacture inIreland, the following factors must beconsidered:
1. Corporate income tax rates in Ireland and the United States.
2. Present and possible future changes in shipping costs.(If Swishing had been using air freight before the
it might encounter a sharp rise in air freight rates afterward. Terrorists attacks and their aftermath can not
but success of a foreign manufacturing venture versus exporting must consider the possibility of any kind o
3. Expected production volume in Ireland relative to the designed manufacturing capacity of the new facto
The cost of manufacturing shoes in Ireland will depend both on the volume for which that plant is designed
4. The cost of labor and material inIreland, versus NorthCarolina; and the availability and level of educatio
5. Theexistence, ornonexistence, of excess capacity in the North Carolinafactory, both at present and in t
6. The political risk of investing in Ireland for the Britishmarket, should the type of political terrorism anda
7. The possibility that valuable technology of a proprietary nature would be stolen.(This might seem unlike
Such a list as above cannot possibly identify all the subjective factors that might go into a decision to inv
Carolina, has received an order for 50,000 cartons of athletic shoes from SouthamptonFootware, Ltd., ofEngland, payment to be in British
a letter of credit issued by a London bank on behalf of Southampton Footware. The letter of credit specifies that the face value of the 0 shi
thampton Footware in accordance with the terms of the letter of credit. The current discount rate in London on 120-day bankers' accepta
al to be 18% per annum. The commission for selling abankers' acceptance in the discount market is 2% of the face amount.
Values
400,000
120
18.000%
12.000%
2.000%
1358.49
eceives dollars at once at the exchange rate then in effect. If Swishing waits 120 days to receive the poundssterling,
between the time of sale and the time of collection.(Of course, Swishing might gain if the pound would buymore, rather thanless,
rted into the United Kingdom. Swishing Shoe Company discovers that it can manufacture shoes in Ireland and import them into Britain fre
oids the 10 % import duty and the discount on suchbanker's acceptances as it now might be incurring.
undertaking the associated translation risk.
to sell thebanker's acceptance intoday's London money market is unique to that moment in time.
would then be preferable.
s to wait 120 days for the cash is unique to that moment in time.
e would then be preferable.
been using air freight before the terrorist attack on the Twin Towers in New York and the Pentagon,
ttacks and their aftermath can not be easily predicted,
nsider the possibility of any kind of unpredictable structural changes.)
acturing capacity of the new factory there.
me for which that plant is designed and the percent of capacity expected to be used in the near future.
e availability and level of education of potential workers.
afactory, both at present and in terms of expected future growth.
e type of political terrorism andanti-British feelings currently in Northern Ireland spread to the Republic of Ireland itself.
be stolen.(This might seem unlikely in the Irish Britishcontext, but for other countries it could be a significantfactor.)
at might go into a decision to invest rather thanexport, but it provides a starting point for consideration of the global strategy of a firm.
d, payment to be in British pounds sterling.
the face value of the 0 shipment, £400,000,
120-day bankers' acceptances is 12% perannum,
ce amount.
n received.
when received.
ather thanless,
more, rather thanless,
Assumptions Values
Carambola expected free cash flow 10,000,000
Expected growth rate in free cash flow 8.5%
Investment life 3
Assumed sale multiple of FCF in year 3 10
Current spot exchange rate (Lp/$) 14.0651
Honduran Lempiras inflation rate 14.0%
U.S. dollar inflation rate 5.5%
SlingerWayne expected annual rate of return 20.5%
a. Calculate the free cash flows in Honduran lempiras(Lp) below: (Round to the nearest wholenumber.)
Assume that the Honduran lempira were to remain fixed over thethree-year investment period. Calcula
Year 0
Carambola expected free cash flow
Expected sale value in year 3
Total expected cash flow
If Slinger Wayne expects to earn at least a 20.5 % annual rate of return on internationalinvestments, th
Method 2
b. Assume that the Honduran lempira were to change in value over time according to purchasing power p
Year 0
Carambola expected free cash flow
Expected sale value in year 3
Total expected cash flow
If Slinger Wayne expects to earn at least a 20.5 % annual rate of return on internationalinvestments, th
Method 2
rying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola.
million Honduran lempiras(Lp) nextyear, and that this free cash flow will continue to grow at a constant rate of 8.5 % per annum indefinit
a company forlong, and plans to sell Carambola at the end of three years for approximately 10 timesCarambola's free cash flow in that y
te is expected to remain at a relatively high rate of 14.0% per annum compared to the U.S. dollar inflation rate of only 5.5% per annum.
national investments like Carambola.
nearest wholenumber.)
investment period. Calculate the free cash flows in U.S. dollarsbelow: (Round to the nearestdollar.)
Year 1 Year 2 Year 3
10,000,000 10850000 11772250 Expected Free Cash Flow In Year2 (FCF2LP ) = FCF 1LP * (1 + g)1
117722500 Expected Sale Value In Year 3 = Expected Free Cash Flow In Year
10,000,000 10,850,000 129,494,750 Total expected cash flow = expected free cash flow + Expected sa
710980 771413 9206813 Expected Free Cash Flow In Year1 (FCF1$ ) = FCF 1LP / S1SL/$
ernationalinvestments, the value of Carambola today is. (Round to the nearestdollar.) 6383260
$6,383,260
ing to purchasing power parity. Calculate the spot exchange rates for the next three years below: (Round to four decimalplaces.)
Year 1 Year 2 Year 3
10,000,000
15.1983 16.4228 17.7460 Expected Exchange Rate Year 2 = Expected Exchange Rate Year 1
657968 660666 7297131 Expected Free Cash Flow In Year1 (FCF1$ ) = FCF 1LP / S1SL/$
ernationalinvestments, the value of Carambola today is. (Round to the nearestdollar.) 5171556
$5,171,556
of 8.5 % per annum indefinitely.
ola's free cash flow in that year.
of only 5.5% per annum.
our decimalplaces.)
ected Exchange Rate Year 1 * (1 + Honduran Inflation Rate / 1 + U.S. Inflation Rate)
Assumptions Values
Sales price per unit, year 1 (US$) $5.12
Sales price increase, per year 3.40%
Initial sales volume, year 1, units 1100000
Sales volume increase, per year 9.80%
Production costs per unit, year 1 $3.91
Production cost per unit increase, per year 4.30%
General and administrative expenses per year $110,000
Depreciation expenses per year $72,000
Finisterra's WACC (pesos) 15.90%
Terminal value discount rate 20.20%
U.S. corporate income taxes (38%) 38.00%
Dividends distributed ($) 77.00%
Current exchange rate (Ps/$) 10
Exchange rate (Ps/$), year 1 11
Exchange rate (Ps/$), year 2 12
Exchange rate (Ps/$), year 3 13
Calculate the cash flow in year 1below: (Round to the nearest whole number. The sales price and cost per un
Year 1 Year 2
Sales price per unit ($) $5.12 $5.29
Sales volume 1100000 $1,207,800
Revenue $5,632,000 $6,394,190
The maximum Mexican peso price Finisterra should offer today for the investment is. (Round to the nearest w
Method 2
The maximum U.S. price Finisterra should offer today for the investment iS. (Round to the nearestdollar.)
, Mexico, manufactures frozen Mexican food which enjoys a large following in the U.S. states of California and Arizona to the north.
ing some of its manufacturing operations to southern California. Operations in California would begin in year 1 for three years and have th
inisterra as an annual cash dividend. Mexican taxes are calculated on grossed up dividends from foreign countries, with a credit forhost-c
is lower than the rate in theU.S.), the current spot exchange rate is Ps10.00/$, and the exchange rates for the next three years will be Ps1
in years 4 through infinity will be the same as the dividends received in year 3. What is the maximum U.S. dollar price Finisterra should off
e number. The sales price and cost per unit must be rounded to the nearestcent.)
Year 3
$5.47 Sales Price Per Unit (Year 2) = Sales Price Per Unit Year 1 * (1 + Expected Sales Price Growth)
$1,326,164 Sales Volume (Year 2) = Sales Volume Year 1 * (1 + Expected Sales Volume Growth)
$7,259,528 Revenue = Sales Price Per Unit ($) * Sales Volume
($4.25)
($5,640,826)
$1,618,702 Gross Profit = Revenue - Total Cost
($110,000)
($72,000)
$1,436,702 Operating profit before taxes = Gross profit - (Less general and administrative expenses + Less
($545,947) U.S. Corporate Income Taxes Payment = Operating profit before taxes - (1 * U.S. Corporate Inc
$890,755 Net income = Operating profit before taxes - (1 - Corporate Income Taxes)
$3,395,453 Terminal Value In US$ = Divided Distributed In Year 4 / Terminal Value Discount Rate
$44,140,886.28 Terminal Value In Ps = Terminal Value In US$ * Exchange Rate (Ps/$)
53057345 Total Cash Flow For Discounting = Dividends Received + Terminal Value In Ps
he investment is. (Round to the nearest wholenumber.) 44772919 PV0$ = CF1$ / (1 + WACC)^1 + CF2$ / (1 + WACC)^2 + CF3$ / (1 +
$44,772,919 PV0$ = -Initial Investment + NPV = (Rate, Values)
$
/ (1 + WACC)^2 + CF3$ / (1 + WACC)^3
= (Rate, Values)
Question 3 Grenouille Properties. Grenouille Properties(U.S.) expects to receive cash dividends from a French joint
The firstdividend, to be paid in oneyear, is expected to be euro790,000. The dividend is then expected
The current exchange rate is $1.3401/euro. Grenouille's weighted average cost of capital is 10%.
Assumptions Values
Dividend, year 1 $790,000
Dividend expected growth rate 9.7%
Current exchange rate 1.3401
Grenouille WACC 10%
Expected appreciation of the euro 3.90%
Expected depreciation of the euro 3.20%
Production cost per unit increase, per year 4.30%
a. Assume that the euro is expected to appreciate 3.90% per annum against the dollar. Calculate the divide
(Round to the nearest whole number for the dividends and round to four decimal places for the excha
Year 0 Year 1
Dividend stream expected from invement (€) $790,000
The present value of the expected dividend stream if the euro is expected to appreciate 3.90% per annu
Method 2
b. Assume that the euro is expected to depreciate 3.20% per annum against the dollar. Calculate the divide
(Round to the nearest whole number for the dividends and round to four decimal places for the excha
Year 0 Year 1
Dividend stream expected from invement (€) $790,000
The present value of the expected dividend stream if the euro is expected to depreciate 3.20% per annu
Method 2
e cash dividends from a French joint venture over the coming three years.
,000. The dividend is then expected to grow 9.7% per year over the following two years.
verage cost of capital is 10%.
gainst the dollar. Calculate the dividends in U.S. dollars for the next three yearsbelow:
to four decimal places for the exchangerates.)
Year 2 Year 3
$866,630 $950,693 Dividend In (Year 2) = Dividend In Year 1 * (1 + Dividend Expected Growth Rate)
1.4467 1.5031 Expected Exchange Rate Year 2 = Expected Exchange Rate Year 1 * (1 + Expected
$1,253,724 $1,428,974 Dividend ($) = Dividend stream expected from invement (€) * Current and expect
ected to appreciate 3.90 % per annum against the dollar is. (Round to the nearestdollar.) 3109715
$3,109,715
gainst the dollar. Calculate the dividends in U.S. dollars for the next three yearsbelow:
to four decimal places for the exchangerates.)
Year 2 Year 3
$866,630 $950,693 Dividend In (Year 2) = Dividend In Year 1 * (1 + Dividend Expected Growth Rate)
1.2557 1.2155 Expected Exchange Rate Year 2 = Expected Exchange Rate Year 1 * (1 - Expected
$1,088,232 $1,155,590 Dividend ($) = Dividend stream expected from invement (€) * Current and expect
ected to depreciate 3.20 % per annum against the dollar is. (Round to the nearestdollar.) 2699215
$2,699,215
Dividend Expected Growth Rate)
Assumptions Values
Sales revenue 35,000,000
Less cash operating expenses -17,000,000
Gross income 18,000,000
Less depreciation expenses -4,000,000
Earnings before interest and taxes 14,000,000
Less Indian taxes at 50% -7,000,000
Net income 7,000,000
Add back depreciation 4000000
Annual cash flow 11,000,000
a. Calculate the cash flows in Indian rupees for years 2011 through 2013below: (Round to the nearest wh
Calculate the cash flows in Indian rupees for years 2014 through 2016below: (Round to the nearest wh
2011 2012
Annual cash flow (Rs) 11,000,000
Initial investment (Rs) (58,000,000)
Sale value (Rs)
Cash flows for discounting (Rs) (58,000,000) 11,000,000
The net present value on this investment from theproject's viewpoint is. (Round to the nearest wholen
Method 2
The internal rate of return on this investment from theproject's viewpoint is. (Round to two decimalpl
Answer Check
b. Calculate the cash flows in U.S. dollars for years 2011 through 2013below: (Round to the nearest whole
2011 2012
Net Income (Rs) 7,000,000
Initial investment (Rs) (58,000,000)
Dividend received in the U.S (Rs) 6300000
Sale value (Rs)
Net cash flow to parent After-tax (Rs) (58,000,000) 6300000
Expected exchange rate (Rs/$) 48 51
The net present value on this investment from theparent's viewpoint is. (Round to the nearestdollar.)
Method 2
The internal rate of return on this investment from theparent's viewpoint is. (Round to two decimalpla
Answer Check
sting Rs58,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market.
r Rs116,000,000. A pro forma income statement for the Indian operation predicts the generation of Rs11,000,000 of annual cash flow,
December31, 2011, and cash flows will occur on December 31st of each succeeding year.
of accounting income. The U.S. corporate tax rate is40% and the Indian corporate tax rate is 50%.
l dividends paid to Natural Mosaic will not be subject to additional taxes in the United States.
ses a weighted average cost of capital of 16% on domesticinvestments, but will add six percentage points
al Mosaic forecasts for therupee/dollar exchange rate on December 31st for the next six years are listed in the popuptable.
116,000,000
11,000,000 11,000,000 11,000,000 127,000,000
oint is. (Round to the nearest wholenumber.) 16419951 NPV = CF0 + CF1/(1 + K) + CF2/(
16419951 NPV = Initial Investment + NPV
ewpoint is. (Round to two decimalplaces.) 30.02% IRR = IRR (Cash Flow in Rs)
0% 0 = CF0 + CF1/(1 + K) + CF2/(1
oint is. (Round to the nearestdollar.) -202163 NPV = CF0 + CF1/(1 + K) + CF2/(
-202163 NPV = Initial Investment + NPV
ewpoint is. (Round to two decimalplaces.) 16.84% IRR = IRR (Cash Flow in Rs)
0% 0 = CF0 + CF1/(1 + K) + CF2/(1 +
00,000 of annual cash flow,
the popuptable.
2014 57
2015 60
2016 63
NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
NPV = Initial Investment + NPV = (Rate, Values)
Dividend received in the U.S (Rs) = Net Income (Rs) * Dividends to Natural Mosaic from India
Net cash flow to parent After-tax ($) = Net cash flow to parent After-tax (Rs) / Expected exchange rate (Rs/$)
Net cash flow to parent After-tax ($) 2016 = (Net cash flow to parent After-tax (Rs) + Sales Value (Rs)) / Expected exchange rate (Rs/$)
NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
NPV = Initial Investment + NPV = (Rate, Values)
Assumptions
Doohicky in Penang (after-tax) 2012 2013 2014
Net ringgit cash flows -28,000 8200 6600
Dollar cash outflows -100 -130
Doohicky in Manila (after-tax)
Net peso cash flows -550,000 190000 160000
Dollar cash outflows -100 -200
a. Calculate the net dollar cash flows from the operations inPenang, Malysia for years 2012 through 2014
Doohicky in Penang (After-tax) 2012
Net cash flows (ringgit) -28,000
If the weighted average cost of capital for Doohicky Devices is 15.0%, the NPV of the operations in Pena
Method 2
Calculate the net dollar cash flows from the operations inManila, Philippines for years 2012 through 20
(Round the exchange rate to two decimal places and the dollar amount to the nearestcent.)
Doohicky in Penang (After-tax) 2012
Net cash flows (ringgit) -550,000
If the weighted average cost of capital for Doohicky Devices is 15.0%, the NPV of the operations in Mani
Method 2
Assumptions
2015 2016 2017 Malaysia Ringgit Trade
7200 9000 10000 Philippine Pesos
-150 -150 Malaysia Ringgit Appreciation
Philippine Pesos depreciation
200000 200000 220000 Doohicky Devices WACC
-300 -400
g, Malysia for years 2012 through 2014below: (Round the exchange rate to four decimal places and the dollar amount to the nearestce
2013 2014 2015 2016 2017
8,200 6,600 7,200 9,000 10,000
5.0%, the NPV of the operations in Penang is. (Round to the nearestcent.) -197 NPV = CF0 + CF1/(1 + K) + CF2/
-197 NPV = Initial Investment + NPV
5.0%, the NPV of the operations in Manila is. (Round to the nearestcent.) -501 NPV = CF0 + CF1/(1 + K) + CF2/
-501 NPV = Initial Investment + NPV
sia, andManila, the Philippines.
ggit or Philippinepesos,
peso trades at Ps50.65/$.
Values
3.6482
50.65
2.1%
4.9%
15.0%
NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
NPV = Initial Investment + NPV = (Rate, Values)
NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
NPV = Initial Investment + NPV = (Rate, Values)
Question 6 HermosaComponents: Baseline Analysis. Hermosa BeachComponents, Inc., of California exports 26,000 sets of
InArgentina, the bulbs are sold for the Argentine peso equivalent of $60 per set. Direct manufacturing costs in th
neither growing norshrinking, and Hermosa holds the major portion of the market. The Argentine government ha
If Hermosa makes theinvestment, it will operate the plant for five years and then sell the building and equipmen
(Net working capital is the amount of current assets less any portion financed by localdebt.) Hermosa will be allo
Hermosa traditionally evaluates all foreign investments in U.S. dollar terms.
Investment.Hermosa's anticipated cash outlay in U.S. dollars in 2012 would be asfollows: All investment outlays
Depreciation and Investment Recovery. Building and equipment will be depreciated over five years on astraight
as may the remaining net book value of the plant.
Sales Price of Bulbs. Locally manufactured bulbs will be sold for the Argentine peso equivalent of $60 per set.
Operating Expenses per Set of Bulbs. Material purchases are asfollows:
Transfer Prices. The $10 transfer price per set for raw material sold by the parent consists of $5 of direct and ind
Taxes. The corporate income tax rate is 42% in both Argentina and the United States(combined federal andstate
Discount Rate. Hermosa Components uses a discount rate of 12% to evaluate all domestic and foreign projects.
Evaluate the proposed investment in Argentina by Hermosa Components(U.S.). Hermosa's management wishes
(and implicitly also assumes the exchange rate remains fixed throughout the life of theproject). Create a project
Calculate the free cash flows in years 2012 through 2014 from theproject's viewpointbelow: (Round to the near
Project Cash Flows In Argentina: Project Viewpoint 2012 2013
Annual unit sold (sets) 26,000
Sales price in Argentina per set 60
Sales Revenue 1560000
Less direct manufacturing and shipping costs $20/$ (520000)
Less cost of U.S. components at $10/set (260000)
Gross profit $780,000
Less depreciation (200000)
Pre-tax profit 580000
Less 42% Argentina taxes (243600)
Net income 336400
Add back depreciation 200000
Annual project cash flow 536400
Return of net working capital
Initial investment ($2,100,000)
Free cash flow for discounting ($2,100,000) 536400
The net present value on this investment from theproject's viewpoint is. (Round to the nearestdollar.)
Method 2
The internal rate of return on this investment from theproject's viewpoint is. (Round to two decimalplaces.)
Answer Check
Calculate the free cash flows in years 2012 through 2014 from theparent's viewpointbelow: (Round to the neare
Project Cash Flows In Argentina: Project Viewpoint 2012 2013
Sales revenue on exports to Argentina 260,000
Less direct and indirect costs on exported sets (130000)
Profit on Hermosa's component sales 130000
Less U.S. taxes on component profits at 42% (54600)
a) Net profit on component sales after-tax 75400
The net present value on this investment from theparent's viewpoint is. (Round to the nearestdollar.)
Method 2
The internal rate of return on this investment from theparent's viewpoint is. (Round to two decimalplaces.)
Answer Check
The project should be rejected because the prospective investment from theparent's viewpoint has a negative N
ornia exports 26,000 sets oflow-density light bulbs per year to Argentina under an import license that expires in five years.
ect manufacturing costs in the United States and shipping together amount to$40 per set. The market for this type of bulb in Argentina is
The Argentine government has invited Hermosa to open a manufacturing plant so imported bulbs can be replaced by local production.
l the building and equipment to Argentine investors at net book value at the time of sale plus the value of any net working capital.
aldebt.) Hermosa will be allowed to repatriate all net income and depreciation funds to the United States each year.
llows: All investment outlays will be made in2012, and all operating cash flows will occur at the end of years 2013 through 2017.
over five years on astraight-line basis. At the end of the fifthyear, the $1,100,000 of net working capital may also be repatriated to the U
nsists of $5 of direct and indirect costs incurred in the United States on theirmanufacture, creating$5 ofpre-tax profit to Hermosa Beach
(combined federal andstate/province). There are no capital gains taxes on the future sale of the Argentinesubsidiary, either in Argentina
mestic and foreign projects.
Values
ding and equipment 1000000
working capital 1100000
al investment 2100000
Values
erials purchased in Argentina (U.S. dollar equivalent) 20
erials imported from Hermosa Beach-USA 10
al variable costs 30
1100000
310200 310200 310200 1410200
13 through 2017.
lso be repatriated to the UnitedStates,
Hermosa wishes to explore the implications of being able to grow sales volume by 3% per year. Argentine inflatio
Although material costs in Argentina are expected torise, U.S.-based costs are not expected to change over the
In addition to the assumptions employedabove, Hermosa now wishes to evaluate the prospect of being able to s
is a conservative estimate of the market value of the firm at that time. Evaluate the project and parent viewpoin
Calculate the free cash flows in years 2012 through 2014 from theproject's viewpointbelow: (Round to the nea
Project Cash Flows In Argentina: Project Viewpoint 2012 2013
Annual unit sold (sets) 25,000
Sales price in Argentina per set 60.00
Sales Revenue 1500000
Less direct manufacturing and shipping costs $20/$ (500000)
Less cost of U.S. components at $10/set (250000)
Gross profit $750,000
Less depreciation (200000)
Pre-tax profit 550000
Less 42% Argentina taxes (209000)
Net income 341000
Add back depreciation 200000
Annual project cash flow 541000
Return of net working capital
Initial investment ($2,200,000)
Free cash flow for discounting ($2,200,000) 541000
The net present value on this investment from theproject's viewpoint is. (Round to the nearestdollar.)
Method 2
The internal rate of return on this investment from theproject's viewpoint is. (Round to two decimalplaces.)
Answer Check
Calculate the free cash flows in years 2012 through 2014 from theparent's viewpointbelow: (Round to the near
Project Cash Flows In Argentina: Project Viewpoint 2012 2013
Sales revenue on exports to Argentina 250,000
Less direct and indirect costs on exported sets (125000)
Profit on Hermosa's component sales 125000
Less U.S. taxes on component profits at 38% (47500)
a) Net profit on component sales after-tax 77500
The net present value on this investment from theparent's viewpoint is. (Round to the nearestdollar.)
Method 2
The internal rate of return on this investment from theparent's viewpoint is. (Round to two decimalplaces.)
Answer Check
The project should be accepted because the prospective investment from theparent's viewpoint has a positive N
Components, Inc., of California exports 25,000 sets oflow-density light bulbs per year to Argentina under an import license that expires in
Direct manufacturing costs in the United States and shipping together amount to $40 per set.
and Hermosa holds the major portion of the market.
mported bulbs can be replaced by local production.
l the building and equipment to Argentine investors at net book value at the time of sale plus the value of any net working capital.
aldebt.) Hermosa will be allowed to repatriate all net income and depreciation funds to the United States each year.
nsists of $5 of direct and indirect costs incurred in the United States on theirmanufacture, creating$5 ofpre-tax profit to Hermosa Beach
(combined federal andstate/province). There are no capital gains taxes on the future sale of the Argentinesubsidiary, either in Argentina
mestic and foreign projects.
% per year. Argentine inflation is expected to average 4% peryear, so sales price and material cost increases of 6% and 5% peryear, respe
xpected to change over thefive-year period.
e prospect of being able to sell the Argentine subsidiary at the end of year 5 at a multiple of the business's earnings in that year. Hermosa
project and parent viewpoint capital budgets. Is the project under this scenario acceptable?
Assumptions Values
Building and equipment 1000000
Net working capital 1200000
Total investment 2200000
Assumptions Values
Materials purchased in Argentina (U.S. dollar equivalent) 20
Materials imported from Hermosa Beach-USA 10
Total variable costs 30
2995710
356984 410963 470935 3533138
et working capital.
enue On Exports To Argentina = Annual Units Sold (Set) * Transfer Price Per Set (Raw material)
d Indirect Costs On Exported Sets = Annual Units Sold (Set) * Direct Costs & Indirect Cost
loss on Hermosa's loss of exports = -(Annual Units Sold (Set) * Materials purchased in Argentina (U.S. dollar equivalent))
taxes on export losses = ABS (Cash flow loss on Hermosa's loss of exports * Corporate income tax rate )
dollar equivalent))
Question 8 HermosaComponents: RevenueGrowth, SalesPrice, and Currency Risk Scenario. Hermosa BeachComponen
InArgentina, the bulbs are sold for the Argentine peso equivalent of $60.00 per set. Direct manufacturing cos
neither growing norshrinking, and Hermosa holds the major portion of the market. The Argentine governmen
it will operate the plant for five years and then sell the building and equipment to Argentine investors at net b
(Net working capital is the amount of current assets less any portion financed by localdebt.) Hermosa will be
Hermosa traditionally evaluates all foreign investments in U.S. dollar terms.
Investment.Hermosa's anticipated cash outlay in U.S. dollars in 2012 would be asfollows: All investment outl
Depreciation and Investment Recovery. Building and equipment will be depreciated over five years on astrai
Sales Price of Bulbs. Locally manufactured bulbs will be sold for the Argentine peso equivalent of $60.00 per s
Operating Expenses per Set of Bulbs. Material purchases are asfollows:
Transfer Prices. The $10 transfer price per set for raw material sold by the parent consists of $5 of direct and
Taxes. The corporate income tax rate is 40% in both Argentina and the United States(combined federal ands
Discount Rate. Hermosa Components uses a discount rate of 15% to evaluate all domestic and foreign project
Hermosa wishes to explore the implications of being able to grow sales volume by 4% per year. Argentine infla
Although material costs in Argentina are expected torise, U.S.-based costs are not expected to change over th
Hermosa now wishes to evaluate the prospect of being able to sell the Argentine subsidiary at the end of year
is a conservative estimate of the market value of the firm at that time.
MelindaDeane, a new analyst at Hermosa and a recent MBAgraduate, believes that it is a fundamental error
rather than first estimating their Argentine peso(Ps) value and then converting cash flow returns to the Unite
and assume it will change in relation to purchasing power.(She is assuming U.S. inflation to be 1% per annum
She also believes that Hermosa should use arisk-adjusted discount rate in Argentina which reflects Argentine
on the assumption that international projects in a risky currency environment should require a higher expecte
Assumptions Values
Total exports 24,000
Investment life 5
Argentina selling price (U.S. dollar equivalent) $60.00
Direct manufacturing cost in U.S. 40
Transfer price per set (Raw material) 10
Direct costs & indirect cost 5
Pre-tax profit to Hermosa Beach 5
Corporate income tax rate (Argentine taxes) 40%
Argentine inflation Rate 5%
U.S. inflation 1%
Discount rate (Argentina viewpoint) 20%
Discount rate (Parent viewpoint) 18%
Calculate the free cash flows in years 2012 through 2014 from theproject's viewpointbelow: (Round to the n
Project Cash Flows In Argentina: Project Viewpoint 2012
PPP Expected exchange Rate (Pesos/$) 3.5000
The net present value on this investment from theproject's viewpoint is. (Round to the nearest wholenumbe
Method 2
The internal rate of return on this investment from theproject's viewpoint is. (Round to two decimalplaces.)
Answer Check
Calculate the free cash flows in years 2012 through 2014 from theparent's viewpointbelow: (Round to the ne
Project Cash Flows In Argentina: Project Viewpoint 2012
Sales revenue on exports to Argentina
Less direct and indirect costs on exported sets
Profit on Hermosa's component sales
Less U.S. taxes on component profits at 40%
a) Net profit on component sales after-tax
The net present value on this investment from theparent's viewpoint is. (Round to the nearestdollar.)
Method 2
The internal rate of return on this investment from theparent's viewpoint is. (Round to two decimalplaces.)
Answer Check
The project should be accepted because the prospective investment from theparent's viewpoint has a positiv
Risk Scenario. Hermosa BeachComponents, Inc., of California exports 24,000 sets oflow-density light bulbs per year to Argentina under an
$60.00 per set. Direct manufacturing costs in the United States and shipping together amount to $40 per set. The market for this type of b
of the market. The Argentine government has invited Hermosa to open a manufacturing plant so imported bulbs can be replaced by local
quipment to Argentine investors at net book value at the time of sale plus the value of any net working capital.
financed by localdebt.) Hermosa will be allowed to repatriate all net income and depreciation funds to the United States each year.
would be asfollows: All investment outlays will be made in2012, and all operating cash flows will occur at the end of years 2013 through
be depreciated over five years on astraight-line basis. At the end of the fifthyear, the $1,000,000 of net working capital may also be repa
rgentine peso equivalent of $60.00 per set.
y the parent consists of $5 of direct and indirect costs incurred in the United States on theirmanufacture, creating$5 ofpre-tax profit to
e United States(combined federal andstate/province). There are no capital gains taxes on the future sale of the Argentinesubsidiary, eit
evaluate all domestic and foreign projects.
es volume by 4% per year. Argentine inflation is expected to average 5% peryear, so sales price and material cost increases of 7% and 6%
costs are not expected to change over thefive-year period. In addition to the assumptions employedabove,
e Argentine subsidiary at the end of year 5 at a multiple of the business's earnings in that year. Hermosa believes that a multiple of 6
e, believes that it is a fundamental error to evaluate the Argentineproject's prospective earnings and cash flows indollars,
onverting cash flow returns to the United States in dollars. She believes the correct method is to use the end-of-year spot rate in 2012 of
uming U.S. inflation to be 1% per annum and Argentine inflation to be 5% perannum).
ate in Argentina which reflects Argentine capital costs (20% is herestimate) and arisk-adjusted discount rate for the parent viewpoint cap
ronment should require a higher expected return than other lower-risk projects. Evaluate the project and parent viewpoint capital budget
Growth Assumptions
4% Building and equipment
Net working capital
7% Total investment
Assumptions
Materials purchased in Argentina (U.S. dollar equivalent)
Materials imported from Hermosa Beach-USA
Total variable costs
Assumptions
Sales multiple in year 5
Spot rate 2012 (Ps/$)
oject's viewpointbelow: (Round to the nearestdollar.)
2013 2014 2015 2016 2017
3.6386 3.7827 3.9325 4.0883 4.2502
3793593
292952 343589 401735 468293 4337868
292952 343589 401735 468293 4337868
from theparent's viewpoint has a positive NPV. (Select from thedrop-down menus.)
ar to Argentina under an import license that expires in five years.
market for this type of bulb in Argentina isstable,
an be replaced by local production. If Hermosa makes the investment,
hat a multiple of 6
Values
1000000
1000000
2000000
Values Growth
20 6%
10
30
Values
6
3.5000
PPP Expected exchange Rate Next Period = (Spot Exchange Rate * (1 + Argentine inflation Rate)) / (1 + U.S. inflation Rate)
Depreciation = -(Building and equipment * Spot Exchange Rate 2012) / Investment Life
NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
NPV = Initial Investment + NPV = (Rate, Values)
Sales Revenue On Exports To Argentina = Annual Units Sold (Set) * Transfer Price Per Set (Raw material)
Direct And Indirect Costs On Exported Sets = Annual Units Sold (Set) * Direct Costs & Indirect Cost
Cash flow from Argentina to Hermosa = Annual project cash flow / Spot Exchange Rate
Cash flow loss on Hermosa's loss of exports = -(Annual Units Sold (Set) * Materials purchased in Argentina (U.S. dollar equival
Less U.S. taxes on export losses = ABS (Cash flow loss on Hermosa's loss of exports * Corporate income tax rate (Argentine tax
Cash Flow From Sale Of Argentina Subsidiary In Dollar (Not Tax) = Sale Price In Pesos / Expected Exchange Rate In That Year
NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
NPV = Initial Investment + NPV = (Rate, Values)