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Question 1 Rio Games and the Brazilian Real.

l. Ryan Lock had planned his trip to the Olympic Games in Rio de​Ja
for expenses while in Rio. But he had postponed exchanging the dollars for Brazilian​currency, real​(B
Given the following average monthly exchange rates in​2016, when should he have exchanged the d

Ryan Lock budget 15000

Month BRL = 1.00 USD Month BRL = 1.00 USD


January 4.0553 May 3.5416
February 3.9651 June 3.4236
March 3.6984 July 3.2785
April 3.5639 Aug 3.1805

a. The Brazilian real proceeds from exchange in January is BRL


b. The Brazilian real proceeds from exchange in February is BRL
c. The Brazilian real proceeds from exchange in March is BRL
d. The Brazilian real proceeds from exchange in April is BRL
e. The Brazilian real proceeds from exchange in May is BRL
f. The Brazilian real proceeds from exchange in June is BRL
g. The Brazilian real proceeds from exchange in July is BRL
h. The Brazilian real proceeds from exchange in August is BRL

i. When should he have exchanged the dollars for real to maximize his Brazilian spending​m
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 de​Janeiro, Brazil, for many months. He had budgeted and saved ​$15,000
Brazilian​currency, real​(BRL or​R$), until the very last minute on August​8th, 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 spending​money? ​

Add exchange rate for this month

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

his Brazilian spending​money? (Select the best choice below.)


he United States at BRL 3.1805 equals 1.00 USD
Question 2 Pokémon GO. Crystal​Gomez, who lives in Mexico City​(as noted in Global Finance in Practice 1.2 in the​
Mexican pesos​(Ps or​MXN). Nintendo of​Japan, one of the owners of​Pokémon GO, will need to convert
in order to record the financial proceeds. The current spot exchange rate between the Mexican peso an
and the current spot rate between the dollar and the Japanese yen​(¥ or​JPY) is 100.00. What the yen p

Bought 100 ​Pokécoins 17.00 (Mexican pesos)

Spot Exchange Rate (MXN/USD) MXN 18.00 1.00 USD


Spot Exchange Rate (JPY/USD) JPY 100.00 1.00 USD

a. What are the proceeds in U.S.​dollars? (Round to four decimal places.)

b. What are the Japanese yen proceeds of the U.S. dollar proceeds of the​sale? (Round to two decimal pla
ce in Practice 1.2 in the​chapter), bought 100 ​Pokécoins for 17.00
GO, will need to convert the Mexican pesos​(Ps or​MXN) into its home​currency, the Japanese​yen,
een the Mexican peso and the U.S. dollar is 18.00 ​(MXN = 1.00​USD),
100.00. What the yen proceeds of Crystal​Gomez's purchase?

0.9444 Proceeds in USD = Proceeds in Mexican Pesos (MXN) / Spot Exchange Ra

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)

Spot Exchange Rate (JPY/USD)


Question 3 Isaac​Díez of Brazil. Isaac​Díez Peris lives in Rio de​Janeiro, Brazil. While attending school in​Spain, he me
Over the summer​holiday, Isaac decides to visit Juan Carlos in Guatemala City for a couple of weeks.​Isaa
Brazilian real​(BRL). Isaac wants to exchange his Brazilian real for Guatemalan quetzals​(GTQ). He collect

Isaac​Díez spending money 4500

GTQ 10.5799 EUR 1.00


EUR 0.4462 BRL 1.00

a. What is the Brazilian​real/Guatemalan quetzal cross​rate? 4.7208

b. How many Guatemalan quetzals will Isaac get for his Brazilian​reais 21243.38
GTQ/BRL 4.7208 = 1.00
Isaac​Díez has 4,500 Brazilian real (BRL)
ding school in​Spain, he meets Juan Carlos Cordero from Guatemala.
y for a couple of weeks.​Isaac's parents give him some spending​money, 4,500
n quetzals​(GTQ). He collects the following​rates:

BRL/GTQ = (GTQ/EUR) * (EUR/BRL)

Proceeds in GTQ = (Answer in a * 4500)


Question 4 Munich to Moscow. For your​post-graduation celebratory​trip, you decide to travel from​Munich, Germ
euros​(EUR) in your wallet. Wanting to exchange all of them for Russian rubles​(RUB), you obtain the fol

Your wallet 15000

USD 1.0644 EUR 1.00


RUB 59.4680 USD 1.00

a. What is the Russian​ruble/euro cross​rate? 63.2977

b. How many Russian rubles will you obtain for your​euros? 949466.09
RUB/EUR 63.298 = 1.00
Your wallet is 15,000 euro (EUR)
o travel from​Munich, Germany, to​Moscow, Russia. You leave Munich with 15,000
es​(RUB), you obtain the following​quotes:

RUB/EUR = (USD/EUR) * (RUB/USD)

Proceeds in RUB = (Answer in a * 15000)


Question 5 Moscow to Tokyo. After spending a week in​Moscow, you get an email from your friend in Japan.
He can get you a very good deal on a plane ticket and wants you to meet him in Tokyo next week to con
You have 450,000 Russian rubles​(RUB) left in your money pouch. In preparation for the trip. you want t

Your money pouch 450000

RUB 30.96 USD 1.00


JPY 84.02 USD 1.00

a. What is the Russian​ruble/yen cross​rate? 0.368484

b. How many Japanese yen will you obtain for your Russian​rubles? 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 following​quotes:

RUB/JPY = (RUB/USD) / (JPY/USD)

Proceeds in JPY = (450000 / Answer in a)


wing​quotes:
Question 6 Mexico's Cada Seis​Años. Mexico was famous - or infamous - for many years for having two things ever
This was the case in​1976, 1982,​1988, and 1994. In its last devaluation on December​20, 1994, the value
What was the percentage​devaluation?

Ps 3.30 USD 1.00


Ps 5.50 USD 1.00

a. The percentage change in the peso versus the dollar was -40.00%

b. The peso since that​time, and we have now weathered two additional​six-year dates​(2000 and​2006), h
ars for having two things every six years ​(cadaseis​años in​Spanish): a presidential election and a currency devaluation.
December​20, 1994, the value of the Mexican peso​(Ps) was officially changed from Ps 3.30/$ to Ps 5.50/$.

Percentage Change = (Begin - End) / (End) * 100%

year dates​(2000 and​2006), has been remarkably stable against all major​currencies, including the dollar
Question 7 Kyle's Competing Job Offers. Kyle, after an arduous​post-graduation job​search, has received an offe
Each of the three countries - the United​Kingdom, the Czech​Republic, and France - offers a different
Kyle wants to first compare all of the compensation packages in a common​currency, the U.S. dollar.
Use the data at the bottom of this page to determine which offer represents the greatest initial U.S.

Currency ISO Currency Salary Signing Bonus


United Kingdom GBP pound (£) 73000 20000
Czech Republic CZK koruna 1850000 325000
France EUR euros (€) 83000 17000

a. The salary in the United Kingdom in USD


GPB/USD 0.7000 = 1.00

b. The bonus in the United Kingdom in USD


GBP/USD 0.7000 = 1.00

c. The total compensation in the United Kingdom is


GBP/USD 0.7000 = 1.00

d. The salary in the Czech Republic in USD


CZK/USD 24.35 = 1.00

e. The bonus in the Czech Republic in USD


CZK/USD 24.35 = 1.00

f. The total compensation in the Czech Republic in USD


CZK/USD 24.35 = 1.00

g. The salary in the France in USD


EUR/USD 0.9000 = 1.00

h. The bonus in the France in USD


EUR/USD 0.9000 = 1.00

i. The total compensation in the France in USD


EUR/USD 0.9000 = 1.00

j. Which posting has the highest total value as measured in U.S.​dollars? (Select the best choice​below
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 signing​bonus, but in a different currency.
on​currency, the U.S. dollar.
ents the greatest initial U.S. dollar compensation package.

Currency = $1.00
0.7000
24.35
0.9000

104285.71 Salary in ($) = (Amount in Foreign Currency / Exchange Rate)

28571.43 Signing Bonus in ($) = (Amount in Foreign Currency / Exchange Rate)

132857.14 Total Compensation ($) = (Answer in a + Answer in b)

75975.36 Salary in ($) = (Amount in Foreign Currency / Exchange Rate)

13347.02 Signing Bonus in ($) = (Amount in Foreign Currency / Exchange Rate)

89322.38 Total Compensation ($) = (Answer in a + Answer in b)

92222.22 Salary in ($) = (Amount in Foreign Currency / Exchange Rate)

18888.89 Signing Bonus in ($) = (Amount in Foreign Currency / Exchange Rate)

111111.11 Total Compensation ($) = (Answer in a + Answer in b)

Select the best choice​below.)


asured in U.S. dollars.
ured in U.S. dollars.
Exchange Rate)

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 per​unit, 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 of​Peng's pricing strategy on the​US$ price? How would you expect the
b. What has been the impact on​Peng's margins from this pricing strategy from 2007 to​2011?
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

a Complete the table​below: ​(Round all values as in year​2007.)


Fixed Rmb Pricing of the PT350 Plasma Cutting Torch
Years Cost (Rmb) Margin (RmB)
2007 16000 1400
2008 15400 2000
2009 14800 2600
2010 14700 2700
2011 14200 3200
2012 14400 3000
2013 14600 2800
2014 14800 2600
Cumulative

b. What has been the impact of​Peng's pricing strategy on the​US$ price?
A. By maintaining a constant price in​Rmb, as the average exchange rate​(Rmb/US$) decreased, the
B. By maintaining a constant price in​Rmb, as the average exchange rate​(Rmb/US$) increased, the p
C. By maintaining a constant price in​Rmb, as the average exchange rate​(Rmb/US$) decreased, the p
D. By maintaining a constant price in​Rmb, as the average exchange rate​(Rmb/US$) increased, the p

c. How would you expect their U.S.​dollar-based customers to have reacted to​this?
A. As the price in​US$ decreased, the U.S.​dollar-based customers would be tempted to look for chea
B. As the price in​US$ increased, the U.S.​dollar-based customers would be tempted to look for che
C. As the price in​US$ remains​constant, 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 on​Peng's margins from this pricing strategy from 2007 to​2011?
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.

w would you expect their U.S.​dollar-based customers to have reacted to​this?


om 2007 to​2011?

Price (Rmb) Margin (%) Average Rate (Rmb/US$) Price (US$) Change US$ Price (%)

17400 8.00% 7.61 2286


6.95
6.83
6.77
6.46
6.31
6.15
6.16

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%

mb/US$) decreased, the price in​US$ increased.


mb/US$) increased, the price in​US$ increased.
mb/US$) decreased, the price in​US$ decreased.
mb/US$) increased, the price in​US$ decreased

tempted to look for cheaper alternatives.


tempted to look for cheaper alternatives.
uld be tempted to look for cheaper alternatives.
m 2007 to​2011?
Rmb/US$) increased.
Rmb/US$) decreased.
mb/US$) increased.
Rmb/US$) decreased.
Margin (RmB) = Price (Rmb) - Cost (RmB)

Margin (%) = Margin (Rmb) / Price (RmB)

Price (US$) = Price (Rmb) / Average Rate (Rmb/US$)

Change US$ Price (%) = (End - Begin) / (Begin)


Question 9 Santiago​Pirolta's Compensation Agreement. Santiago Pirolta has accepted the Managing Director positi
Much of its U.S. sales are based on a variety of bottle​products, both mass market​(e.g., glass bottles for
He will live and work in the United States​(Dallas, Texas) and wishes to be paid in U.S. dollars. Vitro has a
but Vitro wishes to tie his annual performance bonus​(potentially 10 % to 30 % above his base​salary) to
Santiago,​however, is a bit uncertain on having his bonus based on the Mexican peso values of U.S. sales

Vitro's U.S. Sales Annual Avg Rate Vitro's U.S. Sales


Year (million of USD) Change (%) MXN = 1 USD (million of MXN)
2015 820 12.82
2016 844 13.32
2017 845 12.69
2018 861 13.42

a. Complete the table​below: ​(Round all values as in year​2011.)


Vitro's U.S. Sales Annual Avg Rate Vitro's U.S. Sales
Year (million of USD) Change (%) MXN = 1 USD (million of MXN)
2015 820 12.82 10512
2016 844 2.9% 13.32 11242
2017 845 0.1% 12.69 10723
2018 861 1.9% 13.42 11555

b. What advice would you give him based on your completion of the table​above? ​(Select all the choices th
A. Based on​Vitro's U.S.​sales, in both U.S. dollars and Mexican​pesos, you should recommend that Santi
B. Based on​Vitro's U.S.​sales, in both U.S. dollars and Mexican​pesos, you should recommend that San
C. Under the previous Managing​Director, U.S. sales measured both ways was volatile. The​volatility, h
how much volatility he is willing to bear in his annual performance bonus.
D. But more​importantly, 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 his​bonus) as it d
In 2013 U.S. sales grew​(not much, but they​grew), and he would have theoretically received a bonus.
and he would not have received a bonus.
the Managing Director position for Vitro de​Mexico's U.S. operations. Vitro is a​Mexico-based manufacturer of flat and custom glass produ
arket​(e.g., glass bottles for soft drinks and​beer) as well as specialty products​(high-end cosmetic bottles with rare metal coloring and​qua
id in U.S. dollars. Vitro has agreed that his base salary of USD350,000 will be paid in U.S. ​dollars,
% above his base​salary) 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 table​below

Change (%)

Change (%) Vitro's U.S. Sales (million of MXN) = Vitro's U.S. Sales (million of USD) * Annual Avg Rate MXN = 1 US

6.9% Percentage Change = (End - Begin) / (Begin)


-4.6%
7.8%

ve? ​(Select all the choices that​apply.)


ould recommend that Santiago argue for his performance bonus to be based on the Mexican peso value.
hould recommend that Santiago continue to argue for his performance bonus to be based on the U.S. dollar​value, not the translated M
as volatile. The​volatility, however, was larger in pesos than dollars. If that was the only​concern, then it would only be up to Santiago t

U.S.​sales, he would be measured on the actual sales which he had direct control over. Santiago does​not, and will​not, control the exch
ales​(and his​bonus) as it did in 2013.
retically received a bonus. But as measured in Mexican pesos in​2013, as a result of a fall in the value of the​peso, his performance wou
at and custom glass products.
re metal coloring and​quality).

rting to stockholders in Mexican pesos ​(MXN).


mpletion of the table​below?

nual Avg Rate MXN = 1 USD

alue, not the translated Mexican peso value.


d only be up to Santiago to choose his​'risk ​tolerance'long dash

d will​not, control the exchange rate between the dollar and the peso.

eso, his performance would not have been positivelong dash


Question 10 Americo's Earnings and Global Taxation. Americo is a​U.S.-based multinational manufacturing firm w
Americo is traded on the NASDAQ. Americo currently has 656,000 shares outstanding. The basic ope

Shares Outstanding 656

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 each​country, what are​Americo's consolidated earnings and consolidated
All MNEs attempt to minimize their global tax liabilities. Answer the following questions regarding​A
b. What is the total amount in U.S. dollars that Americo is paying across its global business in corpor
c. What is​Americo's effective tax rate​(total taxes paid as a proportion of​pre-tax profit)?
d. What would be the impact on​Americo's EPS and global effective tax rate if Germany instituted a c

a. After deducting taxes in each​country, what are​Americo's consolidated earnings and consolidated e
Calculate the business performance per country​below: ​(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

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary $2,957.50

Consolidated profits (total across units) $9,709.28


Total diluted shares outstanding 656
The consolidated earnings per share in $ $14.80

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

Total global tax bill in U.S. dollars is​(000s) $5,175.68


c. What is​Americo's effective tax rate​(total taxes paid as a proportion of​pre-tax profit)?
The earnings before taxes from each country in U.S. dollars are calculated​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

Consolidated EBT in U.S. dollars is​(000s) $14,884.96

The effective tax rate is 35%

d. What would be the impact on​Americo's EPS and global effective tax rate if Germany instituted a cor
Calculate the business performance per country​below: ​(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

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary $2,957.50

Consolidated profits (total across units) $11,074.58


Total diluted shares outstanding 656
The consolidated earnings per share in $ $16.88

The EPS change from baseline​is: 14%

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

Total global tax bill in U.S. dollars is​(000s) $4,614.55

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

Consolidated EBT in U.S. dollars is​(000s) $15,689.13

The effective tax rate is 29.4%


a​U.S.-based multinational manufacturing firm with ​wholly-owned subsidiaries in​Brazil, Germany, and​China, in addition to domestic o
has 656,000 shares outstanding. The basic operating characteristics of the various business units are as ​follows: 

Brazilian German Chinese


Subsidiary Subsidiary Subsidiary
(R$) (€) (¥)
6290 4400 2590
25% 40% 30%
1.8226 0.6715 7.8164

try in which it currently has operations.


merico's consolidated earnings and consolidated earnings per share in U.S.​dollars?
es. Answer the following questions regarding​Americo's global tax​liabilities:
co is paying across its global business in corporate income ​taxes?
d as a proportion of​pre-tax profit)?
lobal effective tax rate if Germany instituted a corporate tax reduction to 28 %​, and​Americo's earnings before tax in Germany rose to

rico's consolidated earnings and consolidated earnings per share in U.S.​dollars?


w: ​(Round to two decimal places. Round exchange rates to four decimal​places.)
Brazilian Germany Chinese
Subsidiary Subsidiary Subsidiary
6290.00 4400.00 2590.00
1572.50 1760.00 777.00
4717.50 2640.00 1813.00

1.8226 0.6715 7.8164


$2,588.34 $3,931.50 $231.95

is paying across its global business in corporate income ​taxes?


Brazilian Germany Chinese
Subsidiary Subsidiary Subsidiary
1572.50 1760.00 777.00
1.8226 0.6715 7.8164
$862.78 $2,621.00 $99.41
as a proportion of​pre-tax profit)?
dollars are calculated​below:
Brazilian Germany Chinese
Subsidiary Subsidiary Subsidiary
6290.00 4400.00 2590.00
1.8226 0.6715 7.8164
$3,451.11 $6,552.49 $331.35

Tax Rate = Total Tax Bill / Consolidated EBT

bal effective tax rate if Germany instituted a corporate tax reduction to 28 %​, and​Americo's earnings before tax in Germany rose to €4
w: ​(Round to two decimal places. Round exchange rates to four decimal​places.)

Brazilian Germany Chinese


Subsidiary Subsidiary Subsidiary
6290.00 4940.00 2590.00
1572.50 1383.20 777.00
4717.50 3556.80 1813.00

1.8226 0.6715 7.8164


$2,588.34 $5,296.80 $231.95

EPS Change = (EPS New - EPS Base) / (EPS Base)

ntry in U.S. dollars below


Brazilian Germany Chinese
Subsidiary Subsidiary Subsidiary
$1,572.50 1383.20 777.00
1.8226 0.6715 7.8164
$862.78 $2,059.87 $99.41

y in U.S. dollars below:


Brazilian Germany Chinese
Subsidiary Subsidiary Subsidiary
$6,290.00 4940.00 2590.00
1.8226 0.6715 7.8164
$3,451.11 $7,356.66 $331.35

Tax Rate = Total Tax Bill / Consolidated EBT


na, in addition to domestic operations in the United States.

ore tax in Germany rose to €4,940,000​?


e tax in Germany rose to €4,940,000​?
Question 1 Golden Ounce. Under the gold​standard, the price of an ounce of gold in U.S. dollars was $20.76​, while
What would be the exchange rate between the dollar and the pound if the U.S. dollar price had been $4

Country Exchange Rate


USD 20.76 per ounce of gold
GBP 3.857 per ounce of gold
USD 42.96 per ounce of gold

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 decimal​places.) 5.3824 Implied Exchange Rate = USD / GBP

of gold is ​$​/£. ​(Round to four decimal​places.) 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/£

Export price 1645000

Spot Rate Per Pounds


Original spot rate ¥ 198 Per British pound
New spot rate ¥ 189 Per British pound

a. The original import price in British pounds is. ​(Round to two decimal​places.)

b. The original import price in British pounds is. ​(Round to two decimal​places.)

c. The percentage change in the price of the imported truck is (Round to two decimal​places.)

d. (​ Select the best choice​below.)


A. Because the price of the truck itself did not​change, the percentage change in the import price as exp
B. Because the price of the truck itself did not​change, the percentage change in the import price as exp
C. Because the price of the truck itself did not​change, the percentage change in the import price as ex
D. There is not enough information to answer this question.
les it sells in the United Kingdom. The base platform for the Toyota Tundra truck line is ¥1,645,000.
oved from ¥198/£ to ¥189/£. How does this change the price of the Tundra to ​Toyota's British subsidiary in British​pounds?

8308.08 Original Import Price = Export Price / Original Spot Rate

8703.70 New Import Price = Export Price / New Spot Rate

o decimal​places.) 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
British​pounds?

Japanese yen against the British pound itself.


e Japanese yen against the British pound itself.
panese yen against the British pound itself.
Question 3 Peso Changes. In December​1994, the government of Mexico officially changed the value of the Mexican
What was the percentage change in its​value? Was this a​depreciation, devaluation,​appreciation, or​reva

Ps 3.18 USD 1.00


Ps 5.54 USD 1.00

a. What was the percentage change in its​value? (Round to two decimal​places.)

b. Was this a​depreciation, devaluation,​appreciation, or​revaluation? Explain. (Select all the choices that​a
A. Anytime a government sets or resets the value of its​currency, it is a managed or fixed exchange rate.
B. Anytime a government sets or resets the value of its​currency, it is a managed or fixed exchange rate.
C. Anytime a government sets or resets the value of its​currency, 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, or​revaluation? Explain.

-42.60% Percentage Change = (Begin Rate / End Rate) - 1

. (Select all the choices that​apply.)


naged or fixed exchange rate. If that is the​case, any change in its official value must be either a​"revaluation" or​"depreciation." In this​cas
naged or fixed exchange rate. If that is the​case, any change in its official value must be either an​"appreciation" or​"devaluation." In this​c
anaged or fixed exchange rate. If that is the​case, any change in its official value must be either a​"revaluation" or​"devaluation." In this
ar, so its value is less or devalued. In terms of the percentage change​calculation, this is indicated by the negative percentage change.
" or​"depreciation." In this​case, a revaluation.
on" or​"devaluation." In this​case, an appreciation.
tion" or​"devaluation." In this​case, a devaluation.
egative percentage change.
Question 4 Dollar Peg for Hong Kong. The Hong Kong dollar has long been pegged to the U.S. dollar at HK$7.78/
to Yuan 8.11/$, how did the value of the Hong Kong dollar change against the​yuan?

Original Chinese Yuan Yuan 8.32 USD 1.00


Revalued Chinese Yuan Yuan 8.11 USD 1.00
Hong Kong dollar pegged HK/$ 7.78 USD 1.00

a. The original​HK$/Yuan cross rate was ​HK$/Yuan (Round to two decimal​places.)

b. The new​HK$/Yuan cross rate was ​HK$/Yuan (Round to two decimal​places.)

c. (Select from the​drop-down menus.)


As a result of the revaluation of the Chinese​yuan, the Hong Kong dollar has fallen in value against t
he U.S. dollar at HK$7.78/$. When the Chinese yuan was revalued in July 2005 against the U.S. dollar from Yuan 8.32/$

0.9351 Cross Rate = (Exchange Rate (HK$/$) / Exchange Rate (Yuan/$))

0.9593

as fallen in value against the Chinese yuan.


Question 5 Barcelona Exports. Oriol​D'ez Miguel​S.R.L., a manufacturer of heavy duty machine tools near​Barce
Jordan imposes a 13% import duty on all products purchased from the European Union. The Jordani
Given the following spot exchange r ates on April​11, 2010, what is the total cost to the Saudi Arabia

Currency Crossrate Spot Rate


Jordanian dinar (JD) per euro (€) 0.960
Jordanian dinar (JD) per U.S. dollar ($) 0.711
Saudi Arabian riyal (SRI) per U.S. dollar ($) 3.751

Purchase Price in Euro 425000


Jordanian import duty on EU products 13%
Jordanian resale fees 28%

a. The spot​rate, Saudi Arabian riyal per Jordanian dinar is SRI​/JD. ​(Round to five decimal​places.)

b. Calculate the resale price to Saudi Arabia​below: ​(Round to two decimal​places.)


Resale price
Purchase price, converted to Jordanian dinar
Additional fees due on importation (13%)
Total cost, Jordanian dinar
Resale fee in Jordan (28%)
Resale price to Saudi Arabia

c. Price paid in Saudi Arabian riyal is SRI (Round to two decimal​places.)

d. The U.S. dollar equivalent of the final price paid is. ​(Round to two decimal​places.)
duty machine tools near​Barcelona, 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 Arabian​importer, but only after imposing its own re
e total cost to the Saudi Arabian importer in Saudi Arabian​riyal, and what is the U.S. dollar equivalent of that​price?

d to five decimal​places.) 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

cimal​places.) $830,001.69 Price ($) = Price Paid in Saudi Arabian Riyal / Spot Rate Of Exchange (SRI/$
ut only after imposing its own resale fee of 28 %.
of that​price?

RI/$) / Spot Rate Of Exchange (JD/$)

Rate Of Exchnage (JD/€)

D) * Resale Price to Saudi Arabia (JD)

l / Spot Rate Of Exchange (SRI/$)


Question 1 Australia's Current Account. Use the following balance of payments data for Australia from the​IMF

Assumptions (millions USD) 2005 2006 2007 2008


Goods: exports 107011 124913 142421 189057
Goods: imports -120383 -134509 -160205 -193972
Balance on goods -13372 -9596 -17784 -4915
Services: credit 31047 33088 40496 45240
Services: debit -30505 -32219 -39908 -48338
Balance on services 542 869 588 -3098
Income: credit 16445 21748 32655 37320
Income: debit -44166 -54131 -73202 -76719
Balance on income -27722 -32383 -40547 -39399
Current transfers: credit 3333 3698 4402 4431
Current transfers: debit -3813 -4092 -4690 -4805
Balance on current transfers -480 -394 -288 -374

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 the​IMF: What is​Australia's balance on goods and services for years 2007​, 2011, and 2014​?

2009 2010 2011 2012 2013 2014 2015


154777 213782 271719 257950 254180 240704 188345
-159216 -196303 -249238 -270136 -249700 -240252 -207658
-4439 17479 22481 -12186 4480 453 -19313
40814 46968 51653 53034 53550 54240 49716
-42165 -51313 -61897 -65405 -67977 -63549 -57269
-1351 -4345 -10244 -12371 -14427 -9309 -7553
27402 35711 47852 47168 46316 46637 38105
-65809 -84646 -102400 -88255 -85289 -79805 -67842
-38407 -48935 -54548 -41087 -38973 -33168 -29736
4997 5813 7510 7271 7109 6962 5853
-5799 -7189 -9723 9635 -9346 -8996 -7685
-802 -1376 -2213 16906 -2237 -2034 -1832

und to the nearest integer and enter any deficit with a negative​sign.) -$17,196 Balance on goods and services

und to the nearest integer and enter any deficit with a negative​sign.) $12,237

und to the nearest integer and enter any deficit with a negative​sign.) -$8,856
1, and 2014​?

Balance on goods and services = Balance on goods + Balance of services


Question 2 India's Current Account. Use the following balance of payments data for India from the​IMF: What is​Ind

Assumptions (millions USD) 2004 2005 2006 2007


Goods: exports 77939 102175 123876 153530
Goods: imports -95539 -134692 -166572 -208611
Balance on goods -17600 -32517 -42696 -55081
Services: credit 38281 52527 69440 86552
Services: debit -35641 -47287 -58514 -70175
Balance on services 2640 5241 10926 16377
Income: credit 4690 5646 8199 12650
Income: debit -8742 -12296 -14445 -19166
Balance on income -4052 -6650 -6245 -6516
Current transfers: credit 20615 24512 30015 38885
Current transfers: debit -822 -869 -1299 -1742
Balance on current transfers 19793 23643 28716 37143

a. The balance on​goods, services, and income for year 2005 is​(in millions) ​$. ​(Round to the nearest intege

b. The balance on​goods, services, and income for year 2008 is​(in millions) ​$. ​(Round to the nearest intege

c. The balance on​goods, services, and income for year 2011 is​(in millions) ​$. ​(Round to the nearest intege
India from the​IMF: What is​India's balance on​goods, services, and income for years 2005​, 2008​, and 2011​?

2008 2009 2010 2011 2012 2013 2014


199065 167958 230967 307847 298321 319110 329633
-291740 -247908 -324320 -428021 -450249 -433760 -415529
-92675 -79950 -93353 -120174 -151928 -114650 -85895
106054 92889 117068 138528 145525 148649 156252
-87739 -80349 -114739 -125041 -129659 -126256 -137597
18315 12540 2329 13487 15866 22393 18656
15593 13733 9961 10147 9899 11230 11004
-20958 -21272 -25563 -26191 -30742 -33013 -36818
-5365 -7539 -15602 -16044 -20843 -21783 -25815
52065 50526 54380 62735 68611 69441 69786
-3313 -1764 -2270 -2523 -3176 -4626 -4183
48752 48762 52110 60212 65435 64815 65603

​$. ​(Round to the nearest integer and enter any deficit with a negative​sign.) -$33,926 Balance on goods, services, and inc

​$. ​(Round to the nearest integer and enter any deficit with a negative​sign.) -$79,725

​$. ​(Round to the nearest integer and enter any deficit with a negative​sign.) -$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

China's (Mainland) Balance of Payments


Assumptions (million US$) 2005 2006 2007 2008
A. Current account balance 134082 231844 353183 420569
B. Capital account balance 4102 4020 3099 3051
C. Financial account balance 96944 45285 91132 37075
D. Net errors and omissions 15847 3502 13237 18859
E. Reserves and related items -250975 -284651 -460651 -479554

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 the​drop-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 the​drop-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 the​drop-down menu.)
ts data for China​(Mainland) from the​IMF: Is China experiencing a net capital inflow or outflow in years 2006​, 2010​, and 2014​?

2009 2010 2011 2012 2013 2014 2015


243257 237810 136097 215392 148204 277434 330602
3938 4630 5446 4272 3052 -33 316
194494 282234 260024 -36038 343048 -51361 -485614
-41181 -53016 -13768 -87071 -62922 -108257 -188245
-400508 -471658 -387799 -96555 -431382 -117784 342941

ger and enter any deficit with a negative​sign.) $49,305 Net Capital Flow = Capital Account
p-down menu.)

ger and enter any deficit with a negative​sign.) $286,864 Inflow Of Capital
p-down menu.)

ger and enter any deficit with a negative​sign.) -$51,394 Outflow Of Capital
op-down menu.)
010​, and 2014​?

al Flow = Capital Account Balance + Financial Account Balance


Question 4 China's (Mainland) Balance of Payments. Use the following balance of payments data for China​(Mainla

China's (Mainland) Balance of Payments


Assumptions (million US$) 2005 2006 2007 2008
A. Current account balance 134082 231844 353183 420569
B. Capital account balance 4102 4020 3099 3051
C. Financial account balance 96944 45285 91132 37075
D. Net errors and omissions 15847 3502 13237 18859
E. Reserves and related items -250975 -284651 -460651 -479554

a. China's BOP in year 2006 was​(in millions) ​$. ​(Round to the nearest integer and enter any deficit with a
Does​China's BOP balance in year 2006​? Yes. ​(Select from the​drop-down menu.)

b. China's BOP in year 2010 was​(in millions) ​$. ​(Round to the nearest integer and enter any deficit with a
Does​China's BOP balance in year 2006​? Yes. ​(Select from the​drop-down menu.)

c. China's BOP in year 2014 was​(in millions) ​$. ​(Round to the nearest integer and enter any deficit with a
Does​China's BOP balance in year 2006​? No. ​(Select from the​drop-down menu.)
ts data for China​(Mainland) from the​IMF: Does​China's BOP balance in years 2006​, 2010​, and 2014​?

2009 2010 2011 2012 2013 2014 2015


243257 237810 136097 215392 148204 277434 330602
3938 4630 5446 4272 3052 -33 316
194494 282234 260024 -36038 343048 -51361 -485614
-41181 -53016 -13768 -87071 -62922 -108257 -188245
-400508 -471658 -387799 -96555 -431382 -117784 342941

enter any deficit with a negative​sign.) 0 China BOP = Current account balance + Capital Account Balance + Fin

enter any deficit with a negative​sign.) 0

enter any deficit with a negative​sign.) -1


pital Account Balance + Financial Account Balance + Net Errors and Omissions + Reserves and Related Items
Question 5 Iceland Balance of Payments. Use the following Iceland balance of payments data from the​IMF: What i

Assumptions (million USD) 2008 2009 2010 2011 2012


A. Current account balance -4149 -669 -308 -605 -937
B. Capital account balance -12 -11 -11 -13 -10
C. Financial account balance 7367 -21039 -11967 -7348 1047
D. Net errors and omissions -4619 6571 2263 2839 -1091
E. Reserves and related items 1413 15148 10023 5127 991

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 the​IMF: What is​Iceland's total for Groups A through C in years 2009​, 2012 and 2014​?

2013 2014 2015


888 616 709
-11 -14 -11
-942 3010 70111
197 -23 368
-132 -3588 -71177

o the nearest integer and enter any deficit with a negative​sign.) -21719 Iceland BOP = Current account balance + Capital

o the nearest integer and enter any deficit with a negative​sign.) 100

o the nearest integer and enter any deficit with a negative​sign.) 3612
nt account balance + Capital Account Balance + Financial Account Balance
Question 6 Trade Deficits and​J-Curve Adjustment Paths. Assume the United States has the following​import/expor
on average against all major trading partner currencies. What is the​pre-devaluation and​post-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%

a. What is the​pre-devaluation trade​balance?


The revenues from exports are ​$. ​(Round to the nearest​cent.)

b. The expenditures on imports in foreign currency are fc. ​(Round to two decimal​places.)

c. The expenditures on imports in U.S. dollars are ​$. ​(Round to the nearest​cent.)

d. Calculate the​pre-devaluation trade balance​below: ​(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 decimal​places.)

f. The new expenditures on imports in U.S. dollars are ​$. ​(Round to the nearest​cent.)

g. Calculate the​pre-devaluation trade balance​below: ​(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 following​import/export volumes and prices. It undertakes a major​"devaluation" of the​dollar, say 18%
aluation and​post-devaluation trade​balance?

$1,849 Revenue From Export = Price Of Exports ($) * 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)

s to the nearest cent and round foreign currency to two decimal​places.)

$1,849.00
1536.00
$3,287.04
-$1,438.04

2.6098 New Exchange Rate = (Initial Exchange Rate) / (1 - Devaluation Rate)

$4,008.59

s to the nearest cent and round foreign currency to two decimal​places.)

$1,849.00
1536.00
$4,008.59
-$2,159.59
Of Import (Units)

pot Exchange Rate ($/fc)


Question 1 Spencer Grant and Vaniteux​(A). Spencer Grant is a New​York-based investor. He has been closely follow
When he purchased his 400 shares at €17.76 per​share, the euro was trading at $1.3671/€. ​Currently, th

Shares Purchased 400

Assumption Share Price


Original Price When Spencer Purhased His Shares € 17.76
New Price Spencer See In The Market Today € 28.31

a. If Spencer sells his shares​today, what percentage change in the share price would he​receive?
The shareholder return is ​%. (Round to two decimal​places.)

b. What is the percentage change in the value of the euro versus the dollar over this same​period?
The percentage change in the value of the euro versus the dollar is. ​(Round to two decimal​places.)

c. What would be the total return Spencer would earn on his shares if he sold them at these​rates?
If he sold his shares​today, it would yield the following amount in euros euro. ​(Round to two decimal​pl

d. The sales proceeds in U.S. dollars is ​$. ​(Round to the nearest​cent.)

e. The original investment​(cost) of 400 shares in Vaniteux in euros is. ​(Round to two decimal​places.)

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 on​Spencer's investment, net proceeds divided by initial investment is ​%. ​(Round to t
He has been closely following his investment in 400 shares of​Vaniteux, a French firm that went public in February 2010.
$1.3671/€. ​Currently, the share is trading at €28.31 per​share, and the dollar has fallen to $ 1.4124/€.

Exchange Rate $/€


USD 1.3671 EUR 1.00
USD 1.4124 EUR 1.00

uld he​receive?
59.40% Shareholder Return = (P2 - P1) / (P1)

his same​period?
wo decimal​places.) 3.31% Exchange Rate Change = (End - Begin) / (Begin)

m at these​rates?
Round to two decimal​places.) 11324.00 Sale Proceeds (€) = Price Per Shares * Number Of Shares

15994.02 Sale Proceeds ($) = Sale Proceeds (€) * Exchange Rate

wo decimal​places.) 7104.00 Original Cost in Euros (€) = Original Price Per Shares (€) *

l spot rate is ​$. ​(Round to the nearest​cent.) 9711.88 Original Cost in U.S. ($) = Original Cost in Euros (€) * Orig

stment is ​%. ​(Round to two decimal​places.) 64.69% Shareholder Return = (Sale Proceeds ($) - Original Cost)
64.69% Shareholder Return = (1 + Change in Share Price) * (1 + C
Begin) / (Begin)

ares * Number Of Shares

ds (€) * Exchange Rate

ginal Price Per Shares (€) * Numbers of Shares

nal Cost in Euros (€) * Original Exchange Rate

ceeds ($) - Original Cost) / (Original Cost)


nge in Share Price) * (1 + Change In Spot Rate) - 1
Question 2 Carty's Choices. Brian​Carty, a prominent​investor, is evaluating investment alternatives. If he believes a
and the share is expected to pay a dividend of $1.84 per​share, and he expects at least a 12% rate of ret

Assumptions Values
Share price, P1 62.00
Share price, P2 71.00
Dividend paid, D2 1.84
Rate Of Return 12%

a. The shareholder return is. (Round to two decimal​places.) 17.48%

b. A. The​share's expected return of 19.58% far exceeds Mr.​Carty's required return of 12%. He should ther
B. The​share's expected return of 17.48% far exceeds Mr.​Carty's required return of 12%. He should th
C. The​share's expected return of 19.58% far exceeds Mr.​Carty's required return of 12%. He should ther
D. The​share'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 this​type, should he invest in this particular​equity?

Shareholder Return = (D2/P1) + (P2 - P1) / (P1)

return of 12%. He should therefore not make the investment.


d return of 12%. He should therefore make the investment.
return of 12%. He should therefore make the investment.
return of 12%. He should therefore not make the investment.
Question 3 Lantau Beer​(B): Japanese Yen Debt. Lantau Beer of Hong Kong borrowed Japanese yen under a​long-te
The​company's new CFO​believes, however, that what was originally thought to have been relatively​"ch

2010 2011 2012


Annual yen payments on debt agreement (¥) 11700000 11700000 11700000
Average exchange rate, ¥/HK$ 12.77 11.76 11.02
Annual yen debt service, HK$

a. Calculate the necessary variables for the analysis​below: (Round to the nearest​integer.)
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

b. What do you​think? ​(Select from the​drop-down menus.)


The analysis of debt service payments on the Japanese​yen-denominated long-term loan indicates that f
increasing as the Hong Kong dollar has fallen in value against the Japanese yen. In​fact, the Japanese ye
panese yen under a​long-term loan agreement several years ago.
to have been relatively​"cheap debt" is no longer true. What do you​think? 

est​integer.)

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 Kong​dollars, has been steadily
en. In​fact, the Japanese yen debt has not proven to be as cheap as thought.
(¥) / Average exchange rate, ¥/HK$

rs, has been steadily


Question 4 Mattel's Global Performance. Mattel​(U.S.) achieved significant sales growth in its major international re
it reported both the amount of regional sales and the percentage change in those sales resulting from e

Mattel's Global Sales


2001 2002
Sales (000) Sales (000)
Europe $933,410 $1,119,073
Latin America 481243 472935
Canada 150891 164202
Asia Pacific 126064 138018
Total International $1,691,608 $1,894,228
United States 3387663 3425474
Sales Adjustments -379,341 -432,670
Total Net Sales $4,699,930 $4,887,032

Impact of Change in Currency Rates


Region 2001-2002
Europe 6.80%
Latin America -8.90%
Canada 0.20%
Asia Pacific 3.10%

a. What was the percentage change in​sales, in U.S.​dollars, by​region?


Calculate the percentage change in​sales, in U.S.​dollars, by region​below: ​(Round to one decimal​place.
Percentage Change in Sales 2001-2002
Europe 19.9%
Latin America -1.7%
Canada 8.8%
Asia Pacific 9.5%
United States 1.1%

b. What were the percentage change in​sales, by​region, net of currency change​impacts?
Calculate the percentage change in​sales, by​region, net of currency change impacts​below: (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

(Select from the​drop-down menu.)


Currency changes have had a positive impact on the level and growth of consolidated sales between 20
owth in its major international regions between 2001 and 2004​. In its filings with the United States Security and Exchange Commission​(S
ge in those sales resulting from exchange rate changes.

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%

w: ​(Round to one decimal​place.)


2002-2003 2003-2004
21.5% 3.0% Percentage Change = (End - Begin) / (Begin)
-2.2% 15.2%
7.1% 7.9%
30.5% 12.1%
-6.4% 0.0%

hange​impacts?
ange impacts​below: (Round to one decimal​place.)
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%

solidated sales between 2001 and​2004?

of consolidated sales between 2001 and 2004.


nd Exchange Commission​(SEC),

ct Of Change In Currency Rates


Question 5 S&P Equity Returns History. The U.S. equity markets have delivered very different returns over the past
Use the following data arranged by decade to answer the following questions about these U.S. equity in

S​ &P 500 Equity​Returns, 1926-2014​(average annual​return, percent)


Period 1930s 1940s 1950s 1960s 1970s
Capital appreciation ​-5.3% ​3.0% ​13.6% ​4.4% ​1.6%
Dividend Yield ​5.4% ​6.0% ​5.1% ​3.3% ​4.2%
Total return ​0.1% ​9.0% ​18.7% ​7.7% ​5.8%
Source: Data drawn from​"JP Morgan Guide to the​Markets, 2015," JP Morgan Asset Management.

a. Which period shown had the highest total​returns? The​lowest? (Select the best choice​below.)
A. The period with the highest total returns is the​1990s, while the period with the lowest total returns i
B. The period with the highest total returns is the​1950s, while the period with the lowest total returns i
C. The period with the highest total returns is the​1950s, while the period with the lowest total return
D. The period with the highest total returns is the​1990s, while the period with the lowest total returns i

b. Which decade had the highest dividend​returns? When were dividends clearly not a priority for publicly
A. The decade with the highest dividend returns is the​1940s, while the period when dividends were cle
B. The decade with the highest dividend returns is the​1930s, while the period when dividends were clea
C. The decade with the highest dividend returns is the​1930s, while the period when dividends were clea
D. The decade with the highest dividend returns is the​1940s, 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 dividend​dist
Dividend returns during the 1990s were the second lowest in history.

d. How has the 2000s period​fared? 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.

1980s 1990s 2000s 1926 to 2014


​12.6% ​15.3% -2.7% 5.8%
​4.4% ​2.5% ​1.8% ​4.0%
​17.0% ​17.8% -0.9% 9.8%
sset Management.

t choice​below.)
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.

ot a priority for publicly traded​companies? (Select the best choice​below.)


when dividends were clearly not a priority is the 1990s.
when dividends were clearly not a priority is the 1990s.
when dividends were clearly not a priority is the 2000s.
when dividends were clearly not a priority is the 2000s.

ms of their dividend​distributions? (Select from the​drop-down menus.)

have started changing their dividend distribution habits as a ​result? (Select from the​drop-down menus.)
eased their dividend yields since then.
Question 1 Victoria Exports​(Canada). A Canadian​exporter, Victoria​Exports, 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 forward​market? 

Six Payments of 13600

Period Days ForwardC$/euro US$/euro


Spot 0 1.3356 1.3244
1 month 30 1.3379 1.3248
2 months 60 1.3400 1.3250
3 months 90 1.3425 1.3255
6 months 180 1.3446 1.3258
12 months 360 1.3471 1.3287

a. Calculate the forward​premium, the Canadian dollar​proceeds, 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 forward​premium, the U.S. dollar​proceeds, and the difference from the spot rate proc
(Round the forward premium to three decimal places and the U.S. dollar amounts to the nearest​cen
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 forward​market? (Select from the​drop-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 every​payment, 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 the​C$/Euro forward market​below:
nadian dollar amounts to the nearest​cent.)
C$ 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

difference from the spot rate proceeds in the​US$/Euro forward market​below:  ​


. dollar amounts to the nearest​cent.)
US$ Proceeds of Difference
€ 13,600 Over Spot
18011.84 C$ 0.00
18017.28 C$ 5.44
18020.00 C$ 8.16
18026.80 C$ 14.96
18030.88 C$ 19.04
18070.32 C$ 58.48

market? (Select from the​drop-down menus.)


ros, ranging from now to 12 months in the future.
and U.S.​dollars, it can choose which currency to change the euros to at the end of the various periods.
h and every​payment, it would appear that the company should lock in forward rates in C$ for all payments.
Canadian dollar than the U.S. dollar​, the resulting dollar proceeds are higher.
Rate)/(Spot Rate) * (360/Days)
Question 2 Japanese Yen Forward. Use the following spot and forward​bid-ask rates for the Japanese​yen/U.S. dolla

Period ¥/$ Bid Rate ¥/$ Ask Rate


spot 81.01 81.05
1 month 80.64 80.68
2 months 80.49 80.53
3 months 80.06 80.09
6 months 78.85 78.88
12 months 78.51 78.55
24 months 77.46 77.51

a. What is the​mid-rate quote for each​maturity?


Calculate the​mid-rate for each maturity​below: ​(Round to three decimal​places.)
Period Days Forward Bid Rate Ask Rate Mid-Rate
¥/$ ¥/$ ¥/$
spot 0 81.01 81.05 81.030
1 month 30 80.64 80.68 80.660
2 months 60 80.49 80.53 80.510
3 months 90 80.06 80.09 80.075
6 months 180 78.85 78.88 78.865
12 months 360 78.51 78.55 78.530
24 months 720 77.46 77.51 77.485

b. What is the annual forward premium on the yen for all​maturities? (Assume that the U.S. dollar is the h
Calculate the annual forward premium for all maturities​below: ​(Round to three decimal​places.)
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%

c. Which maturities have the smallest and largest forward​premiums?


A. The 1​-month forward rate has the smallest​premium, while the 2​-month forward possesses the large
B. The 24​-month forward rate has the smallest​premium, while the 1​-month forward possesses the large
C. The 3​-month forward rate has the smallest​premium, while the 2​-month forward possesses the larges
D. The 6​-month forward rate has the smallest​premium, while the 12​-month forward possesses the larg
s for the Japanese​yen/U.S. dollar​(¥/$) exchange rate from September​16, 2010, to answer the following​questions:

Mid-Rate = (Bid Rate + Ask Rate) / (2)

ume that the U.S. dollar is the home​currency.)


to three decimal​places.)

Forward Premium = (Spot Rate - Forward Rate)/(Forward Rate) * (360/Days)


Based on the assumaption that U.S. dollar is the home currency we switch the first part of the forward premium formula

nth forward possesses the largest premium.


onth forward possesses the largest premium.
nth forward possesses the largest premium.
onth forward possesses the largest premium.
g​questions:

e forward premium formula


Question 3 Summer​Abroad: Moscow to Mumbai. After spending a week in​Moscow, you get an email from your fr
He can get you a really good deal on a plane ticket and wants you to meet him in Mumbai next week to
rubles left in your money pouch. In preparation for the​trip, you want to exchange your Russian rubles f

Your money pouch 451000

Spot rate​(Rubles/$ or RBL​= 1.00​USD) RBL 65.43 USD 1.00


Spot rate​(Rupee per​dollar, INR​= 1.00​USD) INR 66.24 USD 1.00

a. What is the Russian​ruble/rupee cross​rate?


The Russian​ruble/rupee cross rate is. (Round to four decimal​places.)

b. How many rupees will you obtain for your​rubles?


The number of rupees you will obtain for your rubles is. (Round to the nearest​integer.)
et an email from your friend in India.
n Mumbai next week to continue your global studies. You have 451000
ge your Russian rubles for Indian rupee at the Moscow​airport:

0.9878 RUB/JPY = (RUB/USD) / (JPY/USD)

456583 RUB = (451000 / Answer in a)


Question 4 Swissie Triangular Arbitrage. The following exchange rates are available to you.​(You can buy or sell at t
Can you make a profit via triangular​arbitrage? If​so, show the steps and calculate the amount of profit i

Initial SF 12100000

Banks Spot Exchange Rate


Mt. Fuji Bank ¥ 93.51 USD 1.00
Mt. Rushmore Bank SF 1.01 USD 1.00
Mt. Blanc Bank ¥ 91.17 SF 1.00

a. Calculate the first arbitrage opportunity attempt​below: (Round to the nearest​cent.)


Attempt Number 1: Start with SF to $
Step 1: SF to $ $ 11980198.02
Step 2: $ to ¥ ¥ 1120268316.83
Step 3: ¥ to SF SF 12287685.83
Profit or Loss SF 187685.83

b. This attempt ends in a profit. ​(Select from the drop​down-menu.)

c. The second arbitrage opportunity attempt is calculated​below: (Round to two decimal​places.)


Attempt Number 1: Start with SF to ¥
Step 1: SF to ¥ ¥ 1103157000.00
Step 2: ¥ to $ $ 11797208.85
Step 3: $ to SF SF 11915180.94
Profit or Loss SF -184819.06

d. This attempt ends in a loss. ​(Select from the drop​down-menu.)


o you.​(You can buy or sell at the stated​rates.) Assume you have an initial SF 12,100,000.
alculate the amount of profit in Swiss francs​(Swissies).

arest​cent.)

STEP 1 = (Initial Currency (SF) / Spot Exchange Rate (SF/$))


STEP 2 = (Initial Currency ($) * Spot Exchange Rate (¥/$))
STEP 3 = (Initial Currency (¥) / Spot Exchange Rate (¥/SF))
STEP 4 = (Answer in Step 3 (SF) - Initial Currency (SF))

two decimal​places.)

STEP 1 = (Initial Currency (SF) / Spot Exchange Rate (¥/SF))


STEP 2 = (Initial Currency (¥) * Spot Exchange Rate (¥/$))
STEP 3 = (Initial Currency ($) * Spot Exchange Rate (SF/$))
STEP 4 = (Answer in Step 3 (SF) - Initial Currency (SF))
Question 1 Toyota's Pass-Through. Assume that the export price of a Toyota Corolla from​Osaka, Japan, is ​¥2,15
per year and in Japan it is 0.0​% per year. Use this data to answer the following questions on exchang

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 parity​holds, what should be the exchange rate at the end of the​year?
Assuming purchasing power parity​holds, the exchange rate be at the end of the year should be yen/

c. Assuming​100% exchange rate​pass-through, what will be the dollar price of a Corolla at the end of t
Assuming​100% exchange rate​pass-through, the dollar price of a Corolla at the end of the year will b

d. Assuming​75% exchange rate​pass-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 decimal​places.)

STEP 2 ​Next, calculate the proportional percentage change. (Round to two decimal​places.)

STEP 3 Then, calculate the effective exchange rate used. (Round to three decimal​places.)

Assuming​75% exchange rate​pass-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 the​year, assuming​75% exchange rate​pass-
ta Corolla from​Osaka, 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 rate​pass-through.

Per US dollar

he year expressed in U.S.​dollars? 24532.1770880876


pressed in U.S. dollars is. ​(Round to the nearest​cent.)

xchange rate at the end of the​year? 85.84


at the end of the year should be yen/$. ​(Round to two decimal​places.)

ollar price of a Corolla at the end of the​year? 25047.35


a Corolla at the end of the year will be ​$. ​(Round to the nearest​cent.)

llar price of a Corolla at the end of the​year?

ne decimal​places.) 2.1%

two decimal​places.) 1.57%

ee decimal​places.) 86.281

a Corolla at the end of the year will be ​$. ​(Round to the nearest​cent.) 24918.56
r, assuming​75% exchange rate​pass-through
n in the United States is 2.1%

Export price in $ = Export Price in ¥ / Initial Spot Rate

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). Takeshi​Kamada, a foreign exchange trader at Credit Suisse​(Tokyo), is exploring
or its yen​equivalent, 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 the​drop-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 yielding​currency,
the​U.S.dollar, to lock in a covered interest arbitrage​(CIA) profit.

STEP 1 First, calculate the difference in the interest rates. (Round to three decimal​places.)

STEP 2 Next, calculate the forward premium on the yen. (Round to three decimal​places.)

b. Finally, calculate the covered interest arbitrage​(CIA) profit


Takeshi Kamada generates a CIA profit of yen 583683.00 by investing in the higher interest rate
currency, the​dollar, and simultaneously selling the dollar proceeds forward into yen at a
forward premium which does not completely negate the interest differential.

STEP 1 First, calculate the proceeds of the investment at the U.S. dollar interest rate for 180-Days

STEP 2 Next, convert the U.S. dollars to Japanese yen

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? If​so, how?

ct from the​drop-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

592850000.00 Japanese Yen = Arbitrage Funds Available * Spot Rate (¥/$)

602919557.25 Japanese Yen in 180-Days = Japanese Yen * (1 + Japanese Yen Interest Rate 18
On The Yen

nterest Rate - U.S. Dollar Annual Interest Rate

d Rate) / (Forward Rate) * (360/180) * 100%

nt - Japanese Yen in 180-Days

(1 + U.S. Dollar Interest Rate 180)

llar in 180-Days * 180-Day Forward Rate (¥/$)

nese Yen Interest Rate 180)


Question 3 Casper​Landsten-CIA (A). Casper Landsten is a foreign exchange trader for a bank in New York. He has ​$
money market investment and wonders if he should invest in U.S. dollars for three​months, or make a C

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 the​drop-down menu
The CIA profit potential is 0.845​%, which tells Casper Landsten
he should borrow U.S. dollars and invest in the lower yielding​currency,
the Swiss​franc, in order to earn covered interest arbitrage​(CIA) profits.

STEP 1 First, calculate the difference in the interest rates. (Round to three decimal​places.)

STEP 2 Next, calculate the forward premium on the yen. (Round to three decimal​places.)

b. Finally, the (CIA) profit. (Round to two decimal places.)

STEP 1 First, convert the investment amount to Swiss francs

STEP 2 Next, calculate the proceeds of the Swiss francs amount after 90 days

STEP 3 Next, convert the Swiss francs to U.S. dollars

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 franc​equivalent) for a short term
or three​months, or make a CIA investment in the Swiss franc. He faces the following​quotes:

ct from the​drop-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

1345470.00 Swiss Franc = Arbitrage Funds Available * Spot Rate (SFr/$)

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

Forward Rate) / (Forward Rate) * (360/90) * 100%

U.S. Dollar At U.S. Dollar Interest Rate

nc Interest Rate 90)

c in 90-Days / 90-Days Forward Rate

1 + U.S. Dollar Interest Rate 90)


Question 4 Casper​Landsten-Thirty Days Later. Casper Landsten once again has ​$0.9 million​(or its Swiss franc​equi
He now faces the following rates. Should he enter into a covered interest arbitrage​(CIA) investment?

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 the​drop-down menu
This tells Casper Landsten he should borrow U.S. dollars and invest in
the lower yielding​currency, the Swiss​franc, 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 decimal​places.)

STEP 2 Next, calculate the forward premium on the yen. (Round to three decimal​places.)

b. Finally, the (CIA) profit. (Round to two decimal places.)

STEP 1 First, convert the investment amount to Swiss francs

STEP 2 Next, calculate the proceeds of the Swiss francs amount after 90 days

STEP 3 Next, convert the Swiss francs to U.S. dollars

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 choice​below.)
A. ​No, Casper should not undertake the covered interest arbitrage​transaction, as it would yield a risky p
B. ​Yes, Casper should undertake the covered interest arbitrage​transaction, as it would yield a riskless pr
C. ​Yes, Casper should undertake the covered interest arbitrage​transaction, as it would yield a riskless pr
D. ​No, Casper should not undertake the covered interest arbitrage​transaction, as it would yield a risky p
million​(or its Swiss franc​equivalent) to invest for three months.
arbitrage​(CIA) investment?

ct from the​drop-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

1205730.00 Swiss Franc = Arbitrage Funds Available * Spot Rate (SFr/$)

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

t the best choice​below.)


tion, as it would yield a risky profit​(exchange rate risk is increased with the forward​contract, and counterparty risk still exists if one of his
, as it would yield a riskless profit​(exchange rate risk is eliminated with the forward​contract, but counterparty risk still exists if one of his
, as it would yield a riskless profit​(exchange rate risk is eliminated with the forward​contract, but counterparty risk still exists if one of his
tion, as it would yield a risky profit​(exchange rate risk is increased with the forward​contract, and counterparty risk still exists if one of his
erest Rate - U.S. Dollar Annual Interest Rate

Forward Rate) / (Forward Rate) * (360/90) * 100%

U.S. Dollar At U.S. Dollar Interest Rate

nc Interest Rate 90)

c in 90-Days / 90-Days Forward Rate

1 + U.S. Dollar Interest Rate 90)

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 than​3,000 nautical miles and five time​zones, money and for
The following information has been collected from the respective​areas:

London New York


Spot exchange rate ($/€) 1.3263 1.3263
1-year Treasury bill rate 3.90% 4.50%
Expected inflation rate Unknown 1.25%

a. What do the financial markets suggest for inflation in Europe next​year?


The rate the financial markets suggest for inflation in Europe next year is. ​(Round to three decimal​place

STEP 1 First calculate the New York real rate of interest

b. Estimate​today's 1-year forward exchange rate between the dollar and the euro.
The estimate for​today's 1-year forward exchange rate between the dollar and the euro is ​$​/euro. ​(Roun
ve time​zones, money and foreign exchange markets in both London and New York are very efficient.

Round to three decimal​places.) 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 decimal​places.) 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 throughout​A
primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thai​ba
is considering a​1-year bank loan for $252,000. The current spot rate is B32.02​/$, and the​dollar-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 United​Sta
according to purchase power​parity, what would be the effective cost of funds in Thai baht​terms?

STEP 1 ​First, calculate the value of the U.S.dollar loan amount in one year

STEP 2 Next calculate expected spot rate

STEP 3 Therefore, Baht needed to repay U.S. dollar loan

STEP 4 Then, convert the original loan amount to Thai baht

b. If​EAC'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 dollar​markets), what might be the effec
Assuming a future spot rate for the baht is 5​% weaker than the current spot​rate, the implied cost is. ​(Ro

Change Percentage -0.05

STEP 1 ​First, calculate the value of the U.S.dollar loan amount in one year

STEP 2 Next calculate expected spot rate

STEP 3 Therefore, Baht needed to repay U.S. dollar loan

STEP 4 Then, convert the original loan amount to Thai baht

c. If EAC could borrow Thai baht at 13.00​% per​annum, 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 throughout​Asia, has been funding its Bangkok subsidiary
capital as opposed to Thai​baht-denominated (B) debt. The treasurer of​EAC-Thailand
02​/$, and the​dollar-based interest is 6.79​% for the​1-year period.​1-year loans are 12.02​% in baht.

n Question a.
n Question a.

Thailand and the United​States, respectively, 10.080% Effective Cost Of Funds In Thai Baht = (Baht Ne
nds in Thai baht​terms?

269110.80 U.S. Dollar In One Year = U.S. Dollar Loan Amo

33.00640 Expected Spot Rate = Current Spot Rate * (1 +

8882378.20 Baht Needed To Repay Loan = U.S. Dollar In On

8069040.00 Thai Baht = Loan Principal In U.S. Dollar * Spot

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 baht​terms?
t​rate, the implied cost is. ​(Round to three decimal​places.)

269110.80 U.S. Dollar In One Year = U.S. Dollar Loan Amo

33.7053 Expected Spot Rate = Current Spot Rate / (1 +

9070450.333 Baht Needed To Repay Loan = U.S. Dollar In On

8069040.00 Thai Baht = Loan Principal In U.S. Dollar * Spot

than either part a or part b​?


hly risky given that the future spot rate is not known until a full year has passed.
both are highly risky given that the future spot rate is not known until a full year has passed.
y given that the future spot rate is not known until a full year has​passed, whereas part b has a rate higher than 13.00​%, but is less risky.
ky given that the future spot rate is not known until a full year has​passed, whereas part a has a rate higher than 13.00​%, but is less risky.
nds In Thai Baht = (Baht Needed To Repay Loan / Thai Baht) - 1

ear = U.S. Dollar Loan Amount * (1 + U.S. dollar Interest Rate 1 Year)

= Current Spot Rate * (1 + Expected Thai Inflation) / (1 + Expected U.S. Inflation)

ay Loan = U.S. Dollar In One Year * Expected Spot Rate

ncipal In U.S. Dollar * Spot Rate

ear = U.S. Dollar Loan Amount * (1 + U.S. dollar Interest Rate 1 Year)

= Current Spot Rate / (1 + Change Percentage)

ay Loan = U.S. Dollar In One Year * Expected Spot Rate

ncipal In U.S. Dollar * Spot Rate


13.00​%, but is less risky.
13.00​%, but is less risky.
Question 7 Clayton​Moore's Money Fund. Clayton Moore is the manager of an international money market fund m
interest earnings, Clayton​Moore's fund is a very aggressive fund that searches out relatively​high-intere
interesting opportunity in Malaysia. Since the Asian Crisis of​1997, the Malaysian government enforced
was fixed to the U.S. dollar at RM3.80​/$ for seven years. In​2005, the Malaysian government allowed th
deposits of​180-day maturities are earning 8.898​% per annum. The London eurocurrency market for pou
the​180-day forward rate is $1.5559/£. The initial investment is £1,125,000.00.

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 decimal​places.)

b. The return on the​180-day investment is. ​(Round to three decimal​places.)

c. (Round the percentage to three decimal places and select from the​drop-down menus.)
If Clayton Moore invests in the Malaysian ringgit​deposit, and accepts the uncovered risk associated wit
exchange rate​(managed by the​government), and sells the dollar proceeds​forward, he should expect a
on his​180-day pound investment. This is better than the 4.203% per annum he can earn in the​euro-po

STEP 1 First, convert the initial investment from British pounds to U.S. dollars

STEP 2 Then, convert the U.S. dollars to Malaysian ringgits

STEP 3 Calculate the Malaysian ringgit deposit rate for 180​days

STEP 4 Next, calculate the Malaysian ringgit proceeds after 180 days

STEP 5 Then, convert Malaysian ringgits to U.S. dollars


onal money market fund managed out of London. Unlike many money funds that guarantee their investors a near ​risk-free investment wi
es out relatively​high-interest earnings around the​globe, but at some risk. The fund is​pound-denominated. Clayton is currently evaluating
sian government enforced a number of currency and capital restrictions to protect and preserve the value of the Malaysian ringgit. The rin
ian government allowed the currency to float against several major currencies. The current spot rate today is RM 3.13488/$. Local currenc
urocurrency market for pounds is yielding 4.203​% per annum on similar​180-day maturities. The current spot rate on the British pound is $

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 the​RM/$
orward, he should expect a return of 6.168​%
he can earn in the​euro-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

-Day Forward Rate

nt In British Pounds) - 1) * 100%

in British Pounds * Spot Exchange Rate ($/£)

stment In U.S. Dollars * Spot Exchange Rate (Ringgit/$)

n Ringgit 180-Day Yield * 180/360))*100%

alaysian Ringgit * Malaysian Ringgit Deposit Rate 180-Days

pot Exchange Rate (Ringgit/$)


Question 1 Ecuadorian Sucre. The Ecuadorian sucre​(S) suffered from​hyper-inflationary forces throughout 1999. Its

Initial Spot Exchange Rate (S/$) S 4500 1.00 USD


End Spot Exchange Rate (S/S) S 23900 1.00 USD

a. What was the percentage change in its​value?


The percentage change is​. ​(Round to two decimal​places.) -81.17%
ry forces throughout 1999. Its value moved from Upper S4,500/$ to Upper S23,900/$. What was the percentage change in its ​value?

Percentage Change = (Beginning Rate -Ending Rate) / (Ending Rate) *100%


tage change in its ​value?
Question 2 Canadian​Dollar/U.S. Dollar. The Canadian​dollar's value against the U.S. dollar has seen some significan
period between 1980 and January 2015 to estimate the percentage change in the Canadian​dollar's valu

a. The percentage change in the value of the loonie for the period of January 1980 to January 1986 is. ​(Rou

January​1980-January 1986 1.16 1.41 -17.73% Percentage Change = (Begin


January​1986-October 1991 1.41 1.13 24.78%
October​1991-December 2001 1.13 1.60 -29.38%
December​2001-April 2011 1.60 0.96 66.67%
April​2011-January 2015 0.96 1.25 -23.20%
ollar has seen some significant changes over recent history. Using the graph of the ​C$/US$ exchange rate for the​35-year
e in the Canadian​dollar's value​(affectionately known as the​"loonie") versus the dollar for the following periods.

1980 to January 1986 is. ​(Round to two decimal places. A negative change must be entered with a negative​sign.)

Percentage Change = (Beginning Rate -Ending Rate) / (Ending Rate) *100%


r the​35-year
Question 3 I​ stanbul's Issues. The Turkisk lira​(TL) was officially devalued by the Turkish government in February 200
The Turkish government announced on February 21st that the lira would be devalued by 20​%. The spot

Devalued Percentage 20%

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

a. What was the exchange rate after​devaluation?


The exchange rate after devaluation was TL. ​(Round to the nearest Turkish​lira.)

b. What was the percentage change after falling to TL95,000/$ on February​24, three days after the​devalu
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 the​devaluation? -29.47% Percentage Change = (Beginning Rate -Ending Rate) / (Ending Rate) *100
und to two decimal places. A negative change must be entered with a negative​sign.)

. ​(Round to two decimal places. A negative change must be entered with a negative​sign.)
-11.84% Percentage Devalued = (Spot Rate Feb 21th - Spot Rate Feb 24th) / (Spot Rate F
evaluation Percentage)

ding Rate) / (Ending Rate) *100%

Spot Rate Feb 24th) / (Spot Rate Feb 24th) *100%


Question 4 Bangkok Broken. The Thai baht​(THB) was devalued by the Thai government from THB 24.84/$ to THB 2

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

What was the percentage devaluation of the​baht?


The percentage devaluation of the baht is . ​(Round to two decimal​places.)
ent from THB 24.84/$ to THB 29.15/$ on July​2, 1997. What was the percentage devaluation of the​baht?

USD
USD

-14.79%
Question 5 Mikhail's Dilemma. Mikhail Khodorkovsky was one of the infamous Russian​oligarchs, 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 Swiss​banks, in addition to accounts in

Exchange Rate November 7, 2013 November 7, 2014


Russian rubles per Swiss franc 35.288 48.256
Russian rubles per U.S. dollar 32.402 46.727
U.S. dollars per Swiss franc 1.0891 1.0327

Assumption (Mikhail Balance By Currency)


U.S. Dollar USD 204,000,000
Swiss Franc CHF 150,000,000
Rubles RUB 1,600,000,000

a. What is the value of​Mikhail's portfolio measured in Russian​rubles?


Calculate the portfolio value as measured in rubles. ​(Round to the nearest​ruble.)
Portfolio Value as measured in rubles November 7, 2013 November 7, 2014
Russian ruble account balance 1,600,000,000 1,600,000,000
Swiss franc account balance 5293200000 7238400000
U.S. dollar account balance 6610008000 9532308000
Total 13,503,208,000 18,370,708,000

b. What is the value of​Mikhail's portfolio measured in Swiss​francs?


Calculate the portfolio value as measured in Swiss Francs. ​(Round to the nearest​ruble.)
Portfolio Value as measured in Swiss Francs November 7, 2013 November 7, 2014
Russian ruble account balance 45,341,192 33,156,499
Swiss franc account balance 150,000,000 150,000,000
U.S. dollar account balance 187310623 197540428
Total 382,651,816 380,696,927

c. What is the value of​Mikhail's portfolio measured in U.S. Dollar?


Calculate the portfolio value as measured in U.S. Dollar ​(Round to the nearest​ruble.)
Portfolio Value as measured in U.S. Dollar November 7, 2013 November 7, 2014
Russian ruble account balance 49,379,668 34,241,445
Swiss franc account balance 163365000 154905000
U.S. dollar account balance 204,000,000 204,000,000
Total 416,744,668 393,146,445
d. Which currency demonstrated the greatest fluctuations in total value over the six​dates?
A. The currency which demonstrated the greatest fluctuations in total value over the six dates is U.S. do
B. The currency which demonstrated the greatest fluctuations in total value over the six dates is the Rus
C. The currency which demonstrated the greatest fluctuations in total value over the six dates is the Swi
archs, accumulating billions of dollars in wealth in the​mid-1990s with the fall of the Soviet Union.
release from prison in ​2013, he had taken up residence in Switzerland - with his money. In November​2014,
addition to accounts in Russia still holding RUB1.6 billion. Using the exchange rate table​, answer the​following:

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)

ount Balance Swiss Francs

hange Rate)
Question 6 BP and Rosneft 2015. BP​(UK) and Rosneft​(Russia) had severed a​long-term joint venture in​2013, with
Rosneft financed a large part of the buyout by borrowing heavily. The following​year, in July​2014, BP re
had been​declining, as was the Russian ruble. The winter of​2014-2015 in Europe was a relatively mild​o
total sales were​down, and the ruble had clearly fallen dramatically. And to add debt to​injury, Rosneft w

BP Divident Received 23000000000

Spot Exchange Rate July 2014 (RUB/USD) RUB 34.77 1.00


Spot Exchange Rate July 2015 (RUB/USD) RUB 75.01 1.00

a. Assuming a spot rate of RUB 34.90 equals USD 1.00 in July​2014, how much was the dividend paid to BP
The dividend paid to BP is. ​(Round to the nearest​cent.)

b. If Rosneft were to pay the same dividend to BP in July​2015, 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 July​2015, what might​BP's dividend be in July​2015

​ P's dividend could very well be zero in 2015 if the Russian economy worsened in the first half of the​ye
B
and the fall of the ruble. Even if Rosneft did manage to achieve a positive level of profit in​2015, given it
a dividend in order to preserve cash flow for debt service. ​Finally, at least in the early spring of​2015, the
capital controls that would prevent the payment of the dividend to a foreign stockholder like BP. Capita
term joint venture in​2013, with Rosneft buying BP out with ​$55 billion in cash and a​20% interest​(equity interest) in Rosneft itself.
ollowing​year, in July​2014, BP received a dividend on its ownership interest in Rosneft of RUB23 billion. But​Rosneft's performance
n Europe was a relatively mild​one, and​Europe's purchases of​Rosneft's natural gas had fallen as had the price of natural gas.​Rosneft's
d to add debt to​injury, 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

ot rate at that time was 306625783.23

oil prices truly sent the Russian economy into ​recession,


ght​BP's dividend be in July​2015? ​(Select from the​drop-down menus.)

orsened in the first half of the​year, and​Rosneft's profitability was destroyed from economic​conditions, sanctions,
ve level of profit in​2015, given its sizeable debt payment​obligation, it could choose to not pay
st in the early spring of​2015, 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 containing​economic, financial, and business indicato
Assuming purchasing power​parity, and assuming that the forecasted change in consumer prices is a goo

a. Japanese​yen/U.S. dollar in one year


The forecast of the spot rate for Japanese​yen/U.S. dollar in one year is yen​/$. (Round to two decimal​p
Current Japanese Yen Spot (Current Units Per US$) Oct 17th 116.00
Current U.S. Dollar Spot (Current Units Per US$) Oct 17th 1.00
Japanese Inflation (Consumer Prices Forecast 2015e) 0.0%
U.S. Inflation (Consumer Prices Forecast 2015e) 2.9%

b. Japanese​yen/Australia dollar in one year


The forecast of the spot rate for Japanese​yen/Australia dollar in one year is yen​/A$. (Round to two dec
Current Japanese Yen Spot (Current Units Per US$) Oct 17th 116.00
Current Australia Dollar Spot (Current Units Per US$) Oct 17th 1.13
Japanese Inflation (Consumer Prices Forecast 2015e) 0.0%
Australia Inflation (Consumer Prices Forecast 2015e) 2.8%

c. Australian​dollar/U.S. dollar in one year


The forecast of the spot rate for Australia/U.S. dollar in one year is A$/$. (Round to two decimal​places.
Current Australia Spot (Current Units Per US$) Oct 17th 1.13
Current U.S. Dollar Spot(Current Units Per US$) Oct 17th 1.00
Australia Inflation (Consumer Prices Forecast 2015e) 2.8%
U.S. Inflation (Consumer Prices Forecast 2015e) 2.9%
nancial, and business indicators to answer the following questions.
ge in consumer prices is a good proxy of predicted​inflation, forecast the following exchange​rates:

n​/$. (Round to two decimal​places.) 112.73 Spot Rate Forecast = (Current Japanese Yen Spot)/(Current U.S. Dollar S

is yen​/A$. (Round to two decimal​places.) 99.86 Spot Rate Forecast = (Current Japanese Yen Spot)/(Current Australia Do

Round to two decimal​places.) 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 Spot)/(Current Australia Dollar Spot) * (1 + Japanese Inflation)/(1 + Australia Inflation)

ot)/(Current U.S. Dollar Spot) * (1 + Australia Inflation)/(1 + U.S. Inflation)


Question 8 International Fischer Forecasts. Containing​economic, financial, and business indicators to answer the fo
Purchasing Power Parity applies to the coming​year, forecast the following future spot exchange rates u

a. Japanese​yen/U.S. dollar in one year


The future spot exchange rate for Japanese​yen/U.S. dollar in one year is yen​/$. (Round to two decimal
Current Japanese Yen Spot (Current Units Per US$) Oct 17th
Current U.S. Dollar Spot (Current Units Per US$) Oct 17th
Japanese Interest Rate On 1-yr Govt Bond (Interest Rate 1-yr Govt Latest)
U.S. Interest Rate On 1-yr Govt Bond (Interest Rate 1-yr Govt Latest)

b. Japanese​yen/Australia dollar in one year


The forecast of the spot rate for Japanese​yen/Australia dollar in one year is yen​/A$. (Round to two dec
Current Japanese Yen Spot (Current Units Per US$) Oct 17th
Current Australia Dollar Spot (Current Units Per US$) Oct 17th
Japanese Interest Rate On 1-yr Govt Bond (Interest Rate 1-yr Govt Latest)
Australia Interest Rate On 1-yr Govt Bond (Interest Rate 1-yr Govt Latest)

c. Australian​dollar/U.S. dollar in one year


The forecast of the spot rate for Australia/U.S. dollar in one year is A$/$. (Round to four decimal​places
Current Australia Yen Spot (Current Units Per US$) Oct 17th
Current U.S. Dollar Spot (Current Units Per US$) Oct 17th
Japanese Interest Rate On 1-yr Govt Bond (Interest Rate 1-yr Govt Latest)
U.S. Interest Rate On 1-yr Govt Bond (Interest Rate 1-yr Govt Latest)
ess indicators to answer the following questions. Assuming International Fischer one version of
future spot exchange rates using the government bond rates for the respective country ​currencies:

en​/$. (Round to two decimal​places.) 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 decimal​places.) 97.47 Future Spot Exchange Rate = (Current Japanese Yen Spot)/(C
115.00
1.13
1.68%
6.17%

Round to four decimal​places.) 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)

(1 + Australia Interest Rate On 1-yr Govt Bond)


nterest Rate On 1-yr Govt Bond)
Question 9 Implied Real Interest Rates. Containing​economic, financial, and business indicators to answer the follow
If the nominal interest rate is the government bond​rate, and the current change in consumer prices is u
calculate the implied​"real" rates of interest by currency.

a. Australian dollar​"real" rate


The implied​"real" rate of interest for the Australian dollar is. ​(Round to two decimal​places.)
Australia Nominal Interest Rate (Interest Rate 1-yr Govt Latest) 6.26%
Australia Expected Inflation (Consumer Prices Forecast 2015e) 2.3%

a. Japan "real" rate


The implied​"real" rate of interest for the apan is. ​(Round to two decimal​places.)
Japan Nominal Interest Rate (Interest Rate 1-yr Govt Latest) 1.69%
Japan Expected Inflation (Consumer Prices Forecast 2015e) 0.0%
a. U.S. dollar​"real" rate
The implied​"real" rate of interest for the U.S. dollar is. ​(Round to two decimal​places.)
U.S. Nominal Interest Rate (Interest Rate 1-yr Govt Latest) 4.58%
U.S. Expected Inflation (Consumer Prices Forecast 2015e) 2.8%
ndicators to answer the following questions.
hange in consumer prices is used as expected​inflation,

wo decimal​places.) 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%
mal​places.) 1.73% Implied Real Rate = ((1 + Nominal Interest Rate) / (1 + Expected Inflation) - 1)*100%
+ Expected Inflation) - 1)*100%

+ Expected Inflation) - 1)*100%


+ Expected Inflation) - 1)*100%
Question 10 Real Economic Activity and Misery. Containing​economic, financial, and business indicators to answer the f
Calculate the​country's Misery Index​(unemploymentplus ​inflation) and then use it like an interest differenti

The Misery Index for Australia is. ​(Round to two decimal​places.)


Australia Nominal Interest Rate (Unemployment Rate Latest) 4.2%
Australia Expected Inflation (Consumers Prices Forecast 2015e) 2.4%
a
The Misery Index for Japan is. ​(Round to two decimal​places.)
Japan Nominal Interest Rate (Unemployment Rate Latest) 3.7%
Japan Expected Inflation (Consumers Prices Forecast 2015e) 0.0%

The Misery Index for U.S. is. ​(Round to two decimal​places.)


U.S. Nominal Interest Rate (Unemployment Rate Latest) 4.9%
U.S. Expected Inflation (Consumers Prices Forecast 2015e) 2.6%

a. Japanese​yen/U.S. dollar exchange rate in one year


The future spot Japanese​yen/U.S. dollar exchange rate in one year is yen​/$. (Round to two decimal​places
Current Japanese Yen Spot (Current Units Per US$) Oct 17th 115.00
STEP 1 Current U.S. Dollar Spot (Current Units Per US$) Oct 17th 1.00
3-month Japanese Interest Rate (Interest Rate 3-month Latest) 0.53%
3-month U.S. Interest Rate (Interest Rate 3-month Latest) 4.63%
b. Japanese​yen/Australian dollar exchange rate in one year
The future spot Japanese​yen/Australian dollar exchange rate in one year is yen​/A$. (Round to two decima
Current Japanese Yen Spot (Current Units Per US$) Oct 17th 115.00
STEP 1 Current Australia Dollar Spot (Current Units Per US$) Oct 17th 1.12
3-month Japanese Interest Rate (Interest Rate 3-month Latest) 0.53%
3-month Australia Interest Rate (Interest Rate 3-month Latest) 6.87%

c. Australia dollar/U.S. dollar exchange rate in one year


The future spot Australia dollar/U.S. dollar exchange rate in one year is yen​/$. (Round to four decimal​plac
Current Australia Spot (Current Units Per US$) Oct 17th 1.12
STEP 1 Current U.S. Dollar Spot (Current Units Per US$) Oct 17th 1.00
3-month Australia Interest Rate (Interest Rate 3-month Latest) 6.87%
3-month U.S. Interest Rate (Interest Rate 3-month Latest) 4.63%
ss indicators to answer the following questions.
e it like an interest differential to forecast the future spot exchange​rate, one year into the future.

6.60% Misery Index Australia = Unemployment rate + Inflation

3.70% Misery Index Japan = Unemployment rate + Inflation

7.50% Misery Index U.S = Unemployment rate + Inflation

Round to two decimal​places.) 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 decimal​places.) 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 decimal​places.) 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

Maturity Open High Low Settle


March 0.10953 0.10988 0.10930 0.10958
June 0.10790 0.10795 0.10778 0.10773
Sept 0.10615 0.10615 0.10610 0.10573

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 ​$0.12009​/Ps?
The value of​Amber's position is ​$. ​(Round to the nearest cent. Use a minus sign if value is​negative.)

b. What is the value of her position at maturity if the ending spot rate is ​$0.09825​/Ps?
The value of​Amber's position is ​$. ​(Round to the nearest cent. Use a minus sign if value is​negative.)

c. What is the value of her position at maturity if the ending spot rate is ​$0.11016​/Ps?
The value of​Amber's position is ​$. ​(Round to the nearest cent. Use a minus sign if value is​negative.)
lls eight June futures contracts for 500,000 pesos at the closing price quoted ​here:

Change Lifetime High Lifetime Low Open Interest


0.11000 0.09770 34481.00
0.10800 0.09730 3405.00
0.10615 0.09930 1481.00

c
-500,000
8
Sell
0.11004 Find in Question
0.10773

​ 0.12009​/Ps?
$
minus sign if value is​negative.) -49400 Value = -Notional Principal * (Spot - Future (Settle)) * N

​ 0.09825​/Ps?
$
minus sign if value is​negative.) 38680 Value = -Notional Principal * (Spot - Future (Settle)) * N

​ 0.11016​/Ps?
$
minus sign if value is​negative.) -9240 Value = -Notional Principal * (Spot - Future (Settle)) * N
pot - Future (Settle)) * Number of contracts

pot - Future (Settle)) * Number of contracts

pot - Future (Settle)) * Number of contracts


Question 2 Cece Cao in Jakarta. Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of h
After considerable​study, she has concluded that the Singapore dollar will appreciate versus the U.S. do

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 Singapore​dollars? ​(Select the best choice​belo
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

b. Cece's breakeven price is ​$​/S$. ​(Round to five decimal​places.)

c. What is​Cece'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 is​Cece'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

Option Strike Price Premium


Put (US$/Singapore dollar) 0.65 3E-05
Call (US$/Singapore dollar) 0.65 0.00046

ect the best choice​below.)


she should buy a call on Singapore dollars. This gives her the right to BUY Singapore dollars at a future date at $ 0.6500
each for a profit.​(If her expectation of the future spot rate proves​correct.)
she should buy a call on Singapore dollars. This gives her the right to buy Singapore dollars at a future date at ​$0.7005
each for a profit.​(If her expectation of the future spot rate proves​correct.)
she should buy a put on Singapore dollars. This gives her the right to buy Singapore dollars at a future date at $ 0.6500
each for a profit.​(If her expectation of the future spot rate proves​correct.)
she should buy a call on Singapore dollars. This gives her the right to sell Singapore dollars at a future date at $ 0.6500
each for a profit.​(If her expectation of the future spot rate proves​correct.)

0.65046 Break-Even Rate = Strike + Premium

t the end of 90 days is indeed ​$0.7005​/S$? ​(Round to five decimal​places.) 0.05050 Gross Profit = Expected Spot Rate 90 d
. ​(Round to five decimal​places.) 0.05004 Net Profit =Expected Spot Rate 90 days

t the end of 90 days is ​$0.8006​/S$? ​(Round to five decimal​places.) 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 choose​from:

Buy A Call 1

Buy A Put 0

en Rate = Strike + Premium

fit = Expected Spot Rate 90 days - Strike Price


=Expected Spot Rate 90 days - Strike Price - Premium

fit = New Expected Spot Rate 90 days - Strike Price


= New Expected Spot Rate 90 days - Strike Price - Premium
Question 3 Kiko​Peleh's Puts. Kiko Peleh writes a put option on Japanese yen with a strike price of $0.008000/¥ ​(¥1
The option is for ​¥12,500,000. What is​Kiko's profit or loss at maturity if the ending spot rates are ¥109/

Assumptions a. Values b. Values c. Values d.Values


Notional principal (¥) 12,500,000 12,500,000 12,500,000 12,500,000
Maturity (days) 180 180 180 180
Strike price (US$/¥) 0.008000 0.008000 0.008000 0.008000
Premium (US$/¥) 0.000080 0.000080 0.000080 0.000080
Ending spot rate (¥/US$) 109 114 121 125

a. Kiko's profit or loss at maturity if the ending spot rate is ​¥109​/$ 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

b. Kiko's profit or loss at maturity if the ending spot rate is ​¥114​/$ 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

c. Kiko's profit or loss at maturity if the ending spot rate is ​¥121​/$ 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

d Kiko's profit or loss at maturity if the ending spot rate is ​¥125​/$ 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

e. Kiko's profit or loss at maturity if the ending spot rate is ​¥129​/$ 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 ​¥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

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
trike price of $0.008000/¥ ​(¥125.00/$​) at a premium of 0.0080¢ per yen and with an expiration date six month from now.
e ending spot rates are ¥109/$​, ¥114/$​, ¥121/$​, ¥125/$​, ¥129/$​, ¥134/$​, and ¥141/$.

e. Values f. Values g. Values


12,500,000 12,500,000 12,500,000
180 180 180
0.008000 0.008000 0.008000
0.000080 0.000080 0.000080
129 134 141

nd to the nearest cent and indicate a loss by using a negative​sign.) 1000.00 Total Net Profit = Notional Principa

0.009174 Ending Spot Rate in US$/¥ = 1 / En


ss profit is $0.00 0.00 Gross Profit = Strike Price - Ending
0.000080 Net Profit = Premium - Gross Profit

nd to the nearest cent and indicate a loss by using a negative​sign.) 1000.00 Total Net Profit = Notional Principa

0.008772 Ending Spot Rate in US$/¥ = 1 / En


ss profit is $0.00 0.00 Gross Profit = Strike Price - Ending
0.000080 Net Profit = Premium - Gross Profit

nd to the nearest cent and indicate a loss by using a negative​sign.) 1000.00 Total Net Profit = Notional Principa

0.008264 Ending Spot Rate in US$/¥ = 1 / En


ss profit is $0.00 0.00 Gross Profit = Strike Price - Ending
0.000080 Net Profit = Premium - Gross Profit

nd to the nearest cent and indicate a loss by using a negative​sign.) 1000.00 Total Net Profit = Notional Principa

0.008000 Ending Spot Rate in US$/¥ = 1 / En


ss profit is $0.00 0.00 Gross Profit = Strike Price - Ending
0.000080 Net Profit = Premium - Gross Profit

nd to the nearest cent and indicate a loss by using a negative​sign.) -2100.78 Total Net Profit = Notional Principa

0.007752 Ending Spot Rate in US$/¥ = 1 / En


ss profit is $0.00 0.0002481 Gross Profit = Strike Price - Ending
-0.000168 Net Profit = Premium - Gross Profit

nd to the nearest cent and indicate a loss by using a negative​sign.) -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 negative​sign.) -10347.52 Total Net Profit = Notional Principa

0.007092 Ending Spot Rate in US$/¥ = 1 / En


ss profit is $0.00 0.0009078 Gross Profit = Strike Price - Ending
-0.000828 Net Profit = Premium - Gross Profit
Profit = Notional Principal * Net Profit

ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)


fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit

Profit = Notional Principal * Net Profit

ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)


fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit

Profit = Notional Principal * Net Profit

ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)


fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit

Profit = Notional Principal * Net Profit

ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)


fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit

Profit = Notional Principal * Net Profit

ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)


fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit

Profit = Notional Principal * Net Profit


ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)
fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit

Profit = Notional Principal * Net Profit

ot Rate in US$/¥ = 1 / Ending Spot Rate (¥/US$)


fit = Strike Price - Ending Spot Rate
= Premium - Gross Profit
Question 4 Baker Street. Arthur Doyle is a currency trader for Baker​Street, a private investment house in London.
​each, wish to speculate on the movement of currencies. The investors expect annual returns in excess o
the British pound will slide significantly - possibly to $1.3200/£ - in the coming 30 to 60 days. The curren
return expected by his investors. Which of the following put​options, would you recommend he​purcha

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 60​days" 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 nearest​integer.)

STEP 1 First, calculate the profit​rate


STEP 2 ​Next, calculate the investment principal per person in U.S.​dollars
STEP 3 Next, calculate the notional principal
STEP 4 Calculate the expected profit

c. The return on investment​(ROI) at the strike price of ​$1.34/£ is. ​(Round to the nearest​integer.)

STEP 1 First, calculate the profit​rate


STEP 2 ​Next, calculate the investment principal per person in U.S.​dollars
STEP 3 Next, calculate the notional principal
STEP 4 Calculate the expected profit

d. The return on investment​(ROI) at the strike price of ​$1.32/£ is. ​(Round to the nearest​integer.)

STEP 1 First, calculate the profit​rate


STEP 2 ​Next, calculate the investment principal per person in U.S.​dollars
STEP 3 Next, calculate the notional principal
STEP 4 Calculate the expected profit

e. Arthur should purchase the​60-day option at strike price ​$1.34​/£. (Select from the​drop-down menu.)

The choice of which strike price is an interesting debate.


​- The lower the strike price ​($1.42​/£ or ​$1.40​/£), the cheaper the option price.
​- The reason they are cheaper is​that, statistically​speaking, they are increasingly less likely to end up in
​- The​choice, given that all the options are relatively​"cheap", is to pick the strike price which will yield t
​- The ​$1.40​/£ strike price is too far​"down", given that Arthur only expects the pound to fall to about ​$1
private investment house in London. Baker​Street's clients are a collection of wealthy private investors​who, with a minimum stake of £230
ors expect annual returns in excess of 25 ​%. Although officed in​London, all accounts and expectations are based in U.S. dollars. Arthur is c
the coming 30 to 60 days. The current spot rate is $1.4265/£. Arthur wishes to buy a put on pounds which will yield the 25%
s, would you recommend he​purchase? Prove your choice is the preferable combination of strike​price, maturity, and​up-front premium e

Strike Price ($/pound) Maturity (days) Premium ($/pound)


1.36 30 0.00081
1.34 30 0.00021
1.32 30 4E-05
1.36 60 0.00332
1.34 60 0.00152
1.32 60 0.00062

s choices to the 60​-day options to be sure and capture the timing of the exchange rate change. (Select from the​drop-down menu.)

und to the nearest​integer.) 1105% Return on Investment (ROI) = (Expected Profit (STEP 4) / I

0.03668 Profit Rate = Strike Price - Expected Spot Rate - Premium


328095.00 Investment Principal in U.S. dollars = Investment Principal
98823795.18072 Notional Principal = Investment Principal Per Person in U.S
3624856.81 Expected Profit = Profit Rate * Notional Principal

und to the nearest​integer.) 1216% Return on Investment (ROI) = (Expected Profit (STEP 4) / I

0.01848 Profit Rate = Strike Price - Expected Spot Rate - Premium


328095.00 Investment Principal in U.S. dollars = Investment Principal
215851973.68 Notional Principal = Investment Principal Per Person in U.S
3988944.47 Expected Profit = Profit Rate * Notional Principal

und to the nearest​integer.) -100% Return on Investment (ROI) = (Expected Profit (STEP 4) / I

-0.00062 Profit Rate = Strike Price - Expected Spot Rate - Premium


328095.00 Investment Principal in U.S. dollars = Investment Principal
529185483.87 Notional Principal = Investment Principal Per Person in U.S
-328095.00 Expected Profit = Profit Rate * Notional Principal

Select from the​drop-down menu.)

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, and​up-front premium expense.

he​drop-down menu.)

(Expected Profit (STEP 4) / Initial Investment at Current Spot Rate (STEP 2))*100%

ected Spot Rate - Premium


ollars = Investment Principal in Pounds * Current Spot Rate
nt Principal Per Person in U.S. dollars / Premium
* Notional Principal

(Expected Profit (STEP 4) / Initial Investment at Current Spot Rate (STEP 2))*100%

ected Spot Rate - Premium


ollars = Investment Principal in Pounds * Current Spot Rate
nt Principal Per Person in U.S. dollars / Premium
* Notional Principal

(Expected Profit (STEP 4) / Initial Investment at Current Spot Rate (STEP 2))*100%

ected Spot Rate - Premium


ollars = Investment Principal in Pounds * Current Spot Rate
nt Principal Per Person in U.S. dollars / Premium
* Notional Principal
Question 5 U.S.​Dollar/Euro. The​table, indicates that a​1-year call option on euros at a strike rate of $1.2496/€ wil
But that assumed a volatility of 10.500​% when the spot rate was $1.2527/€. What would the same call
when the spot rate fell to $1.2485/€​?

Pricing Currency Options on the Euro

A U.S.-based firm wishing to buy


or sell euros (the foreign currency)

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)

Call option premium (per unit fc) c $


Put option premium (per unit fc) p $
(European pricing)

Call option premium (%) c


Put option premium (%) p

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​/€

STEP 1 ​First, to calculate the decimal equivalent for 365.00 ​days


STEP 2 Calculate the new forward​rate
STEP 3 Calculate d1 for U.S base firm
STEP 4 Calculate d2 for U.S base firm
STEP 5 N(d1)
STEP 6 N(d2)
STEP 1 ​First, to calculate the decimal equivalent for 365.00 ​days
STEP 2 Calculate the new forward​rate
STEP 3 Calculate d1 for European base firm
STEP 4 Calculate d2 for European base firm
STEP 5 N(d1)
STEP 6 N(d2)

`
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 ​%

A European-based firm wishing to buy


or sell dollars (the foreign currency)

Value Variable Value


1.2527 S0 € 0.7983
1.2435 F0 € 0.8042
1.2496 X € 0.8003
1.453 % rd 2.188 %
2.188 % rf 1.453 %
1 T 1
365 365
10.5 % s 10.5 %

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 decimal​places.) 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))

Portion Of A Year = Number of Days / 365


Forward Rate = Spot Rate * e(((Domestic Interest Rate/100) - (Foreign Interest Rate/100)) * Time)
d1 = LN((Forward Rate/Strike Rate)+(Volatility/100)^2 *(Time/2)) / (Volatility/100)* Sqrt(Time)
d2 = d1 - (Volatility/100)* Sqrt(Time)
N(d1) = Normsdist (d1)
N(d2) = Normsdist (d2)
Portion Of A Year = Number of Days / 365
Forward Rate = Spot Rate * e(((Domestic Interest Rate/100) - (Foreign Interest Rate/100)) * Time)
d1 = LN((Forward Rate/Strike Rate)+(Volatility/100)^2 *(Time/2)) / (Volatility/100)* Sqrt(Time)
d2 = d1 - (Volatility/100)* Sqrt(Time)
N(d1) = Normsdist (d1)
N(d2) = Normsdist (d2)
Question 1 T-Bill Yields 2009. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a
Calculate the simple and annualized yields for the​3-month and​6-month Tresury bills auctioned on Mar

3-Month T-Bill 6-Month T-Bill


Treasury bill, face value $10,000.00 $10,000.00
Price at sale $9,993.95 $9,976.84
Discount $6.05 $23.16
Days 90 180

a. The simple yield for the​3-month Treasury bills is ​%. ​(Round to four decimal​places.)

b. The simple yield for the​6-month Treasury bills is ​%. ​(Round to four decimal​places.)

c. The annualized yield for the​3-month Treasury bills is ​%. ​(Round to four decimal​places.)

d. The annualized yield for the​6-month Treasury bills is ​%. ​(Round to four decimal​places.)
2009 fell to very low levels as a result of the combined events surrounding the global financial crisis.
h Tresury bills auctioned on March​9, 2009, listed here.

mal​places.) 0.0605% Simple Yield 3-month = Discount On Sale / Price Paid On Purchase

mal​places.) 0.2321% Simple Yield 6-month = Discount On Sale / Price Paid On Purchase

decimal​places.) 0.2424% Annualized Yield 3-month = (1 + (Discount On Sale/Price Paid On Purchase))^(360/Days) - 1

decimal​places.) 0.4648% Annualized Yield 6-month = (1 + (Discount On Sale/Price Paid On Purchase))^(360/Days) - 1


rchase))^(360/Days) - 1

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.

Assumptions Values Payment Per Year


Principal Borrowing Need 30,000,000
Maturity Needed, In Years 2
Fixed Rate, 2 Years 5.000% 1
Floating Rate, Six-month LIBOR + Spread 2
Current Six-month LIBOR 3.500%
Spread 1.500%
Fixed-Rate, 1 Year, The Re-Fund 4.500% 1

a. Botany Bay could borrow the US$ 30,000,000 for two years at a fixed 5% rate of interest
For Alternative​1, the interest cost per year is ​$ for the first year and ​$ for the second year. ​(Round to th

For Alternative​1, the certainty over access to capital​is: certain for the first 6​months, certain for the se
certain for the third 6​months, and certain for the fourth 6 months. ​(Select from the​drop-down menus

For Alternative​1, the certainty over cost of capital​is: certain for the first 6​months, certain for the seco
certain for the third 6​months, and certain for the fourth 6 months. ​(Select from the​drop-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 Alternative​2, the interest cost for the first six months is ​$. ​(Round to the nearest​dollar.)

For Alternative​1, the certainty over access to capital​is: certain for the first 6​months, certain for the se
certain for the third 6​months, and certain for the fourth 6 months. ​(Select from the​drop-down menus

For Alternative​1, the certainty over cost of capital​is: certain for the first 6​months, uncertain for the se
uncertain for the third 6​months, and uncertain for the fourth 6 months. ​(Select from the​drop-down m

c. Botany Bay could borrow the US$ 30,000,000 for one year only at 4.500%. At the end of the first​year, B
For Alternative​3, the interest cost for the first year is ​$ and for the second year is. ​(Round to the neares

For Alternative​1, the certainty over access to capital​is: certain for the first 6​months, certain for the se
uncertain for the third 6​months, and uncertain for the fourth 6 months. ​(Select from the​drop-down m

For Alternative​1, the certainty over cost of capital​is: certain for the first 6​months, certain for the seco
certain for the third 6​months, and certain for the fourth 6 months. ​(Select from the​drop-down menus

d. Only Alternative 1 has a certain access and cost of capital for the full​2-year period. Alternative 3​, posse
Alternative 2 has certain access to capital for both​years, but the interest costs in the final 3 of 4 periods

Therefore, depending on the​company's business needs and tolerance for interest rate​risk, it could cho
rrow US$ 30,000,000 in the eurodollar market. Funding is needed for two years.
make a recommendation.

% rate of interest Yr1


for the second year. ​(Round to the nearest​dollar.) 1500000

first 6​months, certain for the second 6​months,


elect from the​drop-down menus.)

st 6​months, certain for the second 6​months,


elect from the​drop-down menus.)

R is currently 3.500%​, and the rate would be reset every six months.
to the nearest​dollar.) 750000

first 6​months, certain for the second 6​months,


elect from the​drop-down menus.)

st 6​months, uncertain for the second 6​months,


hs. ​(Select from the​drop-down menus.)

0%. At the end of the first​year, Botany Bay would have to negotiate for a new​one-year loan. Yr1
ond year is. ​(Round to the nearest dollar and select from the​drop-down menu.) 1350000

first 6​months, certain for the second 6​months,


hs. ​(Select from the​drop-down menus.)

st 6​months, certain for the second 6​months,


elect from the​drop-down menus.)

-year period. Alternative 3​, possessing a lower interest cost in year​1, has no guaranteed access to capital in the second year.
est costs in the final 3 of 4 periods is uncertain.

for interest rate​risk, it could choose between Alternatives 1 and 2. ​(Select from the​drop-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

the second year.


pread) / (2)
Question 3 O'Reilly and CB Solutions. Heather​O'Reilly, the treasurer of CB​Solutions, believes interest rates are goi
Presently, she is paying LIBOR + 2.00​% per annum on $5,200,000 of debt for the next two​years, with pa
Heather has just made an interest payment​today, so the next payment is due six months from now. He
per annum. (CB Solutions' weighted average cost of capital is 12​%, which Heather calculates to be 6​% pe

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 per​6-month period, starting​tomorrow, how much does Hea
The swap COST for the first​six-month period is ​$. (Select from the​drop-down menu and round to the n

STEP 1 Calculate the expected​LIBOR


STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
STEP 4 Calculate the net interest after swap​(in dollars)
STEP 5 Calculate the loan agreement interest​(in dollars)
.
The swap COST for the second​six-month period is ​$. ​(Select from the​drop-down menu and round to th
STEP 1 Calculate the expected​LIBOR
STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
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 the​drop-down menu and round to the
STEP 1 Calculate the expected​LIBOR
STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
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 the​drop-down menu and round to th
STEP 1 Calculate the expected​LIBOR
STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
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 per​6-month period, starting​tomorrow, how much does Heat
The swap COST for the first​six-month period is ​$nothing. ​(Select from the​drop-down menu and round

STEP 1 Calculate the expected​LIBOR


STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
STEP 4 Calculate the net interest after swap​(in dollars)
STEP 5 Calculate the loan agreement interest​(in dollars)

The swap COST for the second​six-month period is ​$. ​(Select from the​drop-down menu and round to th
STEP 1 Calculate the expected​LIBOR
STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
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 the​drop-down menu and round to the
STEP 1 Calculate the expected​LIBOR
STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
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 the​drop-down menu and round to th
STEP 1 Calculate the expected​LIBOR
STEP 2 Calculate the expected interest payment​rate
STEP 3 Calculate the net interest​rate
STEP 4 Calculate the net interest after swap​(in dollars)
STEP 5 Calculate the loan agreement interest​(in dollars)
eves interest rates are going to​rise, so she wants to swap her future​floating-rate interest payments for fixed rates.​
he next two​years, 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​% per​6-month period, compounded​semiannually).

row, how much does Heather save or cost her company by making this​swap?
menu and round to the nearest​dollar.) -65390 Swap Savings (Or Cost) = Net Interest A

4.490% Expected LIBOR = Current LIBOR + 50 B


-3.245% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-168740 Loan Agreement Interest (In Dollars) =

wn menu and round to the nearest​dollar.) -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 nearest​dollar.) -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 nearest​dollar.) -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 this​swap?
p-down menu and round to the nearest​dollar.) -84890 Swap Savings (Or Cost) = Net Interest A

3.740% Expected LIBOR = Current LIBOR - 25 Ba


-2.870% Expected Interest Payment = (- Expecte
-4.503% Net Interest = Expected Interest payme
-234130 Net interest After Swap (In Dollars) = N
-149240 Loan Agreement Interest (In Dollars) =

wn menu and round to the nearest​dollar.) -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 nearest​dollar.) -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 nearest​dollar.) -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))

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))
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 - 25 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))
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​% per​annum, 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 bank​consortium's proposal?
The annual amortizing loan payments for the bank​consortium's proposal is ​$. ​(Round to the nearest​do
N I/Y PV PMT FV
4 12.249% ($220,000,000) 72,811,776 0

b. What would be the annual amortizing loan payments for​Sahara's loan​preferences?


The annual amortizing loan payments for​Sahara's loan preferences is ​$. ​(Round to the nearest​dollar.)
N I/Y PV PMT FV
6 11.748% ($220,000,000) 53,128,302 0

c. How much would annual payments drop on the bank​consortium's proposal if the same loan was stretch
If the same loan was stretched out from four to six​years, 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 in​length, while Sahara would prefer a long maturity of six years.
um, but Sahara believes that is too​high, arguing instead for 11.748​%. The initial values are shown in the​table:

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 nearest​dollar.)

references?
(Round to the nearest​dollar.)

osal if the same loan was stretched out from four to six​years? 18,924,227 Drop On The Bank Consor
yments would drop on the bank​consortium's proposal by ​$. ​(Round to the nearest​dollar.)
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 of​fixed-rate borrowing. Lluvia is the more creditworthy company. They face the follo
in both types of borrowing. Lluvia wants​floating-rate debt, so it could borrow at LIBOR plus 1.000 %. ​Ho
Paraguas wants​fixed-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%

a. Lluvia's comparative advantage is ​%.​(Round to three decimal​places.)

b. Lluvia's net interest after a swap with Paraguas is %. ​(Round to three decimal​places.)

c. Paraguas's net interest after a swap with Lluvia is ​%. ​(Round to three decimal​places.)

d. Lluvia's savings on borrowing versus net swap is ​%. ​(Round to three decimal​places.)

e. Paraguas's savings on borrowing versus net swap is ​%. ​(Round to three decimal​places.)

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 credit​rating,has lower borrowing costs
could borrow at LIBOR plus 1.000 %. ​However, it could borrow fixed at 9.000% and swap for​floating-rate debt.
00%. ​However, it could borrow floating at LIBOR + 2.000% and swap for​fixed-rate debt. What should they​do? (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 decimal​places.) -6.000% Lluvia's Net interest After Swap = (- Lluvia Fixed Rate) + (-Paraguas LIBOR Rate) + Lluvia

hree decimal​places.) -11.000% Paraguas's Net Interest After Swap = (-Paraguas Floating Rate) + (Paraguas's LIBOR Rate

ree decimal​places.) 1.000% Lluvia Savings = Lluvia's Floating Rate + (Lluvia's Net Interest After Swap)

o three decimal​places.) 2.000% Paraguas Savings = Paraguas's Fixed Rate + (Paraguas's Net Interest After Swap)

hould borrow at the floating rate. ​(Select from the​drop-down menus.)


le Paraguas

BOR is 6.000%​.)

Fixed Rate) - (Paraguas floating Rate - Lluvia floating Rate)

uas LIBOR Rate) + Lluvia Fixed Rate

+ (Paraguas's LIBOR Rate) + (-Lluvia Fixed Rate)

erest After Swap)


Question 6 Ganado's Cross-Currency​Swap: SFr for​US$. Ganado Corporation entered into a​3-year cross-currency i
Ganado, however, decided to unwind the swap after one yearlong dash thereby having two years left on
Repeat the calculations for​unwinding, but assume that the following rates now​apply:

Assumptions Values Swap Rates


Notional principal 10500000 Original: US dollar
Original spot rate (SFr/$) 1.45 Original: Swiss franc
New (1-year later) spot (SFr/$) 1.50
New fixed US$ interest 5.20%
New fixed Swiss franc interest 2.50%

a. The notional principal in Swiss francs is SFr. ​(Round to the nearest Swiss​franc.)

In the first year of the​swap, Ganado will receive ​$. ​(Round to the nearest​dollar.)

In the second year of the​swap, Ganado will receive ​$. ​(Round to the nearest​dollar.)

In the third year of the​swap, Ganado will receive ​$. ​(Round to the nearest​dollar.)

In the first year of the​swap, Ganado will pay SFr. ​(Round to the nearest Swiss​franc.)

In the second year of the​swap, Ganado will pay SFr. ​(Round to the nearest Swiss​franc.)

In the third year of the​swap, Ganado will pay SFr. ​(Round to the nearest Swiss​franc.)

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 nearest​dollar.)

The present value of the dollar cash flow in year 3 is ​$. ​(Round to the nearest​dollar.)

The cumulative present value of the remaining dollar cash flows is ​$. ​(Round to the nearest​dollar.)

The present value of the franc cash flow in year 2 is SFr. ​(Round to the nearest Swiss​franc.)

The present value of the franc cash flow in year 3 is SFr. ​(Round to the nearest Swiss​franc.)

The cumulative present value of the remaining franc cash flows is SFr. ​(Round to the nearest Swiss​fran

The conversion from Swiss francs to dollars of the cash outflow is ​$. ​(Round to the nearest​dollar.)
The settlement of the unwinding is ​$. ​(Round to the nearest​dollar.)

This is a cash receipt by Ganado from the swap dealer. ​(Select from the​drop-down menus.)
tion entered into a​3-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 now​apply:

3-Year Bid 3-Year Ask


5.56% 5.59%
1.93% 2.01%

rest Swiss​franc.) 15225000 Notional Principal In Swiss Francs = Notional Principal in U.S

the nearest​dollar.) 583800 U.S. Dollars Received Year 1 = Notional Principal * U.S. Dollar 3

to the nearest​dollar.) 583800 U.S. Dollars Received Year 2 = Notional Principal * U.S. Dollar 3

o the nearest​dollar.) 11083800 U.S. Dollars Received Year 3 = (Notional Principal * U.S. Dollar

he nearest Swiss​franc.) 306023 Swiss Francs Paid Year 1 = Notional Principal In Swiss Francs * S

o the nearest Swiss​franc.) 306023 Swiss Francs Paid Year 2 = Notional Principal In Swiss Francs * S

he nearest Swiss​franc.) 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 nearest​dollar.) 554943 Present Value = (Cash Flow)(U.S. Dollar Received - Notional Principal) *(1)/(1

d to the nearest​dollar.) 10015144 Present Value = (Cash Flow)(U.S. Dollar Received Year 3) *(1)/(1 + Intere

ws is ​$. ​(Round to the nearest​dollar.) 10570087 Cumulative PV Of Remaining Cash Flows = Present Value Of

nd to the nearest Swiss​franc.) 298559 Present Value = (Cash Flow)(Swiss Francs Paid Year 1) *(1)/(1 + Interest

nd to the nearest Swiss​franc.) 14782651 Present Value = (Cash Flow)(Swiss Francs Paid Year 1) *(1)/(1 + Interest

s is SFr. ​(Round to the nearest Swiss​franc.) 15081209 Cumulative PV Of Remaining Cash Flows = Present Value Of

w is ​$. ​(Round to the nearest​dollar.) 10054140 Cumulative PV Of Swiss Francs Cash Outflows In Dollars = C
515947 Settlement = Cash Inflow (Cumulative PV Of Remaining Cash Flows) - Cash Ou

t from the​drop-down menus.)


ncs = Notional Principal in U.S. Dollars * Original Spot Exchange Rate (SFr/$)

tional Principal * U.S. Dollar 3-Years Bid Rate

tional Principal * U.S. Dollar 3-Years Bid Rate

otional Principal * U.S. Dollar 3-Years Bid Rate) + Notional Principal

al Principal In Swiss Francs * Swiss Franc 3-Year Ask Rate

al Principal In Swiss Francs * Swiss Franc 3-Year Ask Rate

nal Principal In Swiss Francs * Swiss Francs 3-Year Ask Rate) + Notional Principal In Swiss Francs

Dollar Received - Notional Principal)


*(1)/(1 + Interest RateU.S)^1

Dollar Received Year 3)


*(1)/(1 + Interest RateU.S)^2

ash Flows = Present Value Of Cash Flow Year 2 + Present Value Of Cash Flow Year 3

s Francs Paid Year 1)


*(1)/(1 + Interest RateSFr)^1

s Francs Paid Year 1)


*(1)/(1 + Interest RateSFr)^2

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. Bobcat​Company, U.S.-based manufacturer of industrial​equipment, just purchased a
The purchase price was Won7,500 million.​Won1,000 million has already been​paid, and the remaining W
The current spot rate is Won1,110​/$, and the​6-month forward rate is Won1,175​/$. The​6-month Korea
Bobcat can invest at these interest​rates, or borrow at​2% per annum above those rates. A​6-month call
while the​6-month put option at the same strike rate has a 2.4​% premium.

Bobcat can invest at the rates given​above, or borrow at​2% 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 market​hedge?

c. How much in U.S. dollars will Bobcat pay in 6 months with a money market​ hedge?

d. First calculate the option premium in 6 months


How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6
Assumptions 1,200
How much in U.S. dollars will Bobcat pay in 6 months with an option hedge if the expected spot rate in 6
Assumptions 1,300

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​/$. The​6-month Korean won interest rate is 16​% per​annum, the​6-month U.S. dollar rate is 4​% per annum.
ose rates. A​6-month call option on won with a Won1,200​/$ 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 (

5531914.89 Payments = Accounts payable (

5693193.19 Payments = (Accounts Payable)

184459.46 Option Premium in 6 months =


he expected spot rate in 6 months is assumed to be less than Won1,200 ​/$? 5601126.13 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 (1/6-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

Payments = (Accounts Payable * 1 / Spot Rate in 6 months) + Option Premium in 6 months


Question 2 Siam Cement. Siam​Cement, the​Bangkok-based cement​manufacturer, suffered enormous losses with t
The company had been pursuing a very aggressive growth strategy in the​mid-1990s, taking on massive
(primarily U.S.​dollars). When the Thai baht​(B) was devalued from its pegged rate of B24.5​/$ in July​199
$900 million on its outstanding dollar debt​(with an average interest rate of 8.23​% on its U.S. dollar deb
$54 million in debt in June 1997 at 8.23​% ​interest, and had to repay it in one year when the spot exchan
what was the foreign exchange loss incurred on the​transaction?

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 of​foreign-currency-denominated debt​
rate of B24.5​/$ in July​1997, Siam's interest payments alone were over​
.23​% on its U.S. dollar debt at that​time). Assuming Siam Cement took out
year when the spot exchange rate had stabilized at Upper B 41.5/$ ​,

und to the nearest whole​number.) 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 and​Boeing, 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 the​year). 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 rate​quote, 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

STEP 1 Calculate the Implied One-Year Forward Rate

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 considerable​discount, the net long position - if sold f
ufacturers of regional jets​(Bombardier of Canada is the​other).
y Airbus and​Boeing, 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 the​year). 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

sh position is covered by a​ one-year forward​ contract? 108315471

, 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)

ed One-Year Forward Rate


Question 4 Caribou River. Caribou​River, Ltd., a Canadian manufacturer of​raincoats, does not selectively hedge its
all foreign​currency-denominated cash flows must utilize the following mandatory forward cover​formul

Mandatory Forward Cover 0-90 days 91-180 days 180 days


Paying the points forward 75% 70% 50%
Receiving the points forward 100% 90% 50%
Payments 3600000 1900000 850000

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 exchange​rates, 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 3​months?

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 with​certainty,
ory forward cover​formula:

ear. Kr3,600,000 is due in 90 ​days; Kr 1,900,000 is due in 180​days; and Kr850,000 is due in one year.
unt of forward cover required by company policy for each​period?

pany policy in 3​months? 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)

ounts Receivable * Percentage Points * (1 / Forward Rate)

ounts Receivable * Percentage Points * (1 / Forward Rate)


Question 5 Chronos Time Pieces. Chronos Time Pieces of Boston exports watches to many​countries, selling in local
Chronos prides itself on being financially conservative. At least​70% of each individual transaction expos
but occasionally with options.​Chronos' foreign exchange policy is such that the​70% hedge may be incre
Chronos has just shipped to its major North American distributor. It has issued a​90-day invoice to its bu
The current spot rate is ​$1.2221​/euro​, the​90-day forward rate is ​$1.2281​/euro. ​Chronos' treasurer, Ma
He currently believes the euro will weaken against the dollar in the coming 90 to 120​days, possibly to a

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

Case​1: Manny is right and the spot rate in 90 days is ​$1.1633​/euro.


a. How much in U.S. dollars will Chronos receive in 90 days if​ 100% of the transaction exposure is hedged w

How much in U.S. dollars will Chronos receive in 90 days if​70% of the transaction exposure is hedged w
Transaction Exposure Hedge 70%

How much in U.S. dollars will Chronos receive in 90 days if​70% of the transaction exposure is hedged w
Transaction Exposure Hedge 120%

Case​2: Manny is right and the spot rate in 90 days is ​$1.2546​/euro.


How much in U.S. dollars will Chronos receive in 90 days if​ 100% of the transaction exposure is hedged w

How much in U.S. dollars will Chronos receive in 90 days if​70% of the transaction exposure is hedged w
Transaction Exposure Hedge 70%

How much in U.S. dollars will Chronos receive in 90 days if​70% of the transaction exposure is hedged w
Transaction Exposure Hedge 120%

What would be considered the most conservative transaction exposure management policy by a​firm? H
If the value of the foreign currency is expected to​depreciate, the 120% hedge will yield the greatest dol
while if the value of the foreign currency is expected to​appreciate, the 70% hedge will yield the greates
​(Select from the​drop-down menus.)

b. What would be considered the most conservative transaction exposure management policy by a​firm? 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 short​position), the firm could experience nearly unlimited losses or​gains."
The statement above is TRUE. ​(Select from the​drop-down menu.)
y​countries, selling in local currencies to stores and distributors.
dividual transaction exposure is​hedged, mostly in the forward​market,
he​70% hedge may be increased up to a​120% hedge if devaluation or depreciation appears imminent.
d a​90-day invoice to its buyer for euro1,790,000.
o. ​Chronos' treasurer, Manny​Hernandez, has a very good track record in predicting exchange rate movements.
to 120​days, 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 forward​contract? 2163501 Proceeds = (Accounts Receivable * Hedge Proportion *

tion exposure is hedged with the forward​contract? 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 forward​contract? 2212530 Proceeds = (Accounts Receivable * Hedge Proportion *

tion exposure is hedged with the forward​contract? 2188812 Proceeds = (Accounts Receivable * Hedge Proportion *

gement policy by a​firm? How does Chronos​compare?


e will yield the greatest dollar value for the accounts​receivable,
edge will yield the greatest dollar value for the accounts receivable.

gement policy by a​firm? How does Chronos​compare?


may choose to leave any proportion uncovered or purchase cover for more than the exposure ​
mited losses or​gains."
e * 90-day Forward 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)

e * 90-day Forward 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 Burton​Manufacturing, a​U.S.-based
Burton's system combines a​low-cost active tag that is attached to inventory items​(the tag emits an ext
the​low-grade emissions for inventory control. Burton has completed the sale of an inventory managem
The exchange rates shown in the popup​window, were available to Burton on the dates​shown, correspo

Date Event Spot Rate ($/pound)


February 1 Price quotation for Pegg 1.7862
March 1 Contract signed for sale 1.7453
Contract amount, pounds 2000000
June 1 Product shipped to Pegg 1.7674
August 1 Product received by Pegg 1.7896
September 1 Pegg Met makes payment 1.7255

a. What will be the amount of foreign exchange gain​(loss) upon​settlement? ​(Round to the nearest​dollar

b. If Jason hedges the exposure with a forward contract purchased on the date the product is​shipped, 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 is​signed, wha
Enter a positive number for a gain or a negative number for a loss.
finance for Burton​Manufacturing, a​U.S.-based manufacturer of handheld computer systems for inventory management.​
ached to inventory items​(the tag emits an extremely​low-grade radio​frequency) 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 dates​shown, corresponding to the events of this specific export sale. Assume each month is 30 days.

Forward Rate ($/pound) Days Forward


1.7777 210
1.7372 180

1.7599 90
1.7871 30

pon​settlement? ​(Round to the nearest​dollar.)

chased on the date the product is​shipped, what will be the net foreign exchange gain​(loss) on​settlement?

chased on the date the contract is​signed, what will be the net foreign exchange gain​(loss) on​settlement?
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)

ot Rate On Shipment Date)

Rate On Shipment Date)


Question 7 Maria Gonzalez and Ganado. Ganadolong dashthe ​U.S.-based company discussed in this chapterlong da
Total payment of ​£3,800,000 is due in 90 days. Maria Gonzalez has also learned that Ganado will only be
Given the exchange rates and interest rates in the popup​window, compare alternate ways below that G

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 market​hedge?

c. How much in U.S. dollars will Ganado receive in 90 days with a money market​hedge?

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 British​banks).
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 90​days? 

transaction exposure with the ​$1.6900​/pound put option and the pound depreciates below ​$1.6900​/pound in 90​days?

e accounts receivable when using the cost of capital as the reinvestment rate ​(carry-forward rate).
erns of the British​banks).
financial year.

6688760 Proceeds = Accounts Receivable * Spot Rate in 90 days

6648480 Proceeds = Accounts Receivable * 90-day Forward Rate

6835060 Proceeds = Accounts Receivable * Expected Forward Rate

6648480 Proceeds = Accounts Receivable * 90-day Forward Rate

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)

Rate * (1 + WACC * 90/360)

Rate * (1 + WACC * 90/360)


Question 1 Ganado Europe ​(A). Using facts in the chapter for Ganado​Europe, assume the exchange rate on Januar
Recalculate Ganado​Europe's translated balance sheet for January​2, 2016, with the new exchange rate

December 31, 2015

Exchange Rate Translated


Assets In Euros (US$/euro) Accounts (US$)
Cash 2000000 1.16 2320000
Accounts receivable 3500000 1.16 4060000
Inventory 2900000 1.16 3364000
Net plant and equipment 4800000 1.16 5568000
Total 13200000 15312000
Liabilities and Net Worth
Accounts payable 600000 1.16 696000
Short-term bank debt 1000000 1.16 1160000
Long-term debt 1700000 1.16 1972000
Common stock 2400000 1.232 2956800
Retained earnings 7500000 1.16 8700000
Translation adjustment (CTA) — -172800
Total 13200000 15312000

(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 or​loss? Enter a positive number for a gain and negative for a los

b. Where should it appear in the financial​statements? ​(Select the best choice​below.)


A.The translation gain​(loss) for the year is added to the balance in the Cumulative Translation Adjustm
B.The translation gain​(loss) for the year is added to the balance in the Retained Earnings account.
C.The translation gain​(loss) for the year is added to the balance in the Total Assets account.
D.The translation gain​(loss) for the year is added to the balance in the Total Liabilities and Net Worth ac
ssume the exchange rate on January​2, 2016, in Exhibit 11.5 dropped in value from ​$1.1600​/euro to ​$0.8000​/euro.
2016, with the new exchange rate using the current rate method as shown in the popup ​window.

January 2, 2016

Exchange Rate Translated


(US$/euro) Accounts (US$)
0.8000 1600000
0.8000 2800000
0.8000 2320000
0.8000 3840000
10560000

0.8000 480000
0.8000 800000
0.8000 1360000
1.2320 2956800
1.1600 8700000
-3736800
10560000

um of additions to retained earnings of all prior​years,

ber for a gain and negative for a loss. -3564000 Translation Gain (Loss) = CTA in 2016 - CTA in 2015

choice​below.)
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 Ganado​Europe, assume that the exchange rate on Jan
Recalculate Ganado​Europe's translated balance sheet for January​2, 2016, with the new exchange rate

December 31, 2015

Exchange Rate Translated


Assets In Euros (US$/euro) Accounts (US$)
Cash 1400000 1.22 1708000
Accounts receivable 2500000 1.22 3050000
Inventory 2500000 1.238 3095000
Net plant and equipment 4800000 1.293 6206400
Total 11200000 14059400
Liabilities and Net Worth
Accounts payable 800000 1.22 976000
Short-term bank debt 1000000 1.22 1220000
Long-term debt 1300000 1.22 1586000
Common stock 2500000 1.293 3232500
Retained earnings 5600000 1.2641 7044900
Translation gain (loss) —
Total 11200000 14059400

(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 temporal​method, 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 or​loss? Enter a positive number for a gain and negative for a los

b. Where should it appear in the financial​statements? ​(Select the best choice​below.)


A.The translation gain​(loss) for the year is added to the balance in the Total Assets account.
B.The translation gain​(loss) for the year is added to the balance in the Retained Earnings account.
C.The translation gain​(loss) for the year is added to the balance in the Cumulative Translation Adjustme
D.The translation gain​(loss) for the year is added to the balance in the Total Liabilities and Net Worth ac

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 January​2, 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

Exchange Rate Translated


(US$/euro) Accounts (US$)
0.91 1274000
0.91 2275000
1.238 3095000
1.293 6206400
12850400

0.91 728000
0.91 910000
0.91 1183000
1.293 3232500
1.2641 7044900
?
12850400

um of additions to retained earnings of all prior​years,

into retained earnings through the income statement rather

ber for a gain and negative for a loss. -248000 Translation Gain (Loss) = Total Assets - Accounts Payable - Sh

choice​below.)
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 choice​below.)
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 and​long-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 Ganado​Europe, assume that the exchange rate on Ja
Calculate Ganado​Europe's translated balance sheet for January​2, 2016, with the new exchange rate us

December 31, 2015

Exchange Rate Translated


Assets In Euros (US$/euro) Accounts (US$)
Cash 1200000 1.11 1332000
Accounts receivable 3200000 1.11 3552000
Inventory 2400000 1.134 2721600
Net plant and equipment 4800000 1.184 5683200
Total 11600000 13288800
Liabilities and Net Worth
Accounts payable 900000 1.11 999000
Short-term bank debt 1800000 1.11 1998000
Long-term debt 1800000 1.11 1998000
Common stock 1900000 1.184 2249600
Retained earnings 5200000 1.1512 6044200
Translation gain (loss) —
Total 11600000 13288800

(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 temporal​method, 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 or​loss? Enter a positive number for a gain and negative for a los

b. Where should it appear in the financial​statements? ​(Select the best choice​below.)


A.The translation gain​(loss) for the year is added to the balance in the Total Assets account.
B.The translation gain​(loss) for the year is added to the balance in the Cumulative Translation Adjustme
C.The translation gain​(loss) for the year is added to the balance in the Retained Earnings account.
D.The translation gain​(loss) for the year is added to the balance in the Total Liabilities and Net Worth ac
sume that the exchange rate on January​2, 2016, in Exhibit 11.6 appreciated from ​$1.1100​/euro to ​$1.5000​/euro.
016, with the new exchange rate using the temporal rate method as shown in the popup​window.

January 2, 2016

Exchange Rate Translated


(US$/euro) Accounts (US$)
1.5 1800000
1.5 4800000
1.134 2721600
1.184 5683200
15004800

1.5 1350000
1.5 2700000
1.5 2700000
1.184 2249600
1.1512 6044200
?
15004800

um of additions to retained earnings of all prior​years,

into retained earnings through the income statement rather

ber for a gain and negative for a loss. -39000 Translation Gain (Loss) = Total Assets - Accounts Payable - Sho

choice​below.)
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 Bangkok​Instruments, Ltd.(A). Bangkok​Instruments, 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
including​copper - its business has begun to grow rapidly. Sales are primarily to multinational companie
Bangkok​Instruments' balance sheet in thousands of Thai bahts​(B) as of March 31 is shown in the popup

Assets Liabilities & Net Worth


Cash 23000000 Accounts payabl 17000000
Accounts receivable 35000000 Bank loans 61000000
Inventory 50000000 Common stock 16000000
Net plant & equipment 59000000 Retained earning 73000000
Total 167000000 167000000

Exchange rates for translating Bangkok​Instruments' balance sheet into U.S. dollars​are:
Assumptions
April 1 exchange​rate, after​25% devaluation.
March 31 exchange​rate, before​25% 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. Bangkok​Instruments' tran
and the one using the temporal method is shown​here. 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
prior​years, 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 rate​method, 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 translation​gain, 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 the​drop-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 popup​window:

U.S. dollars​are:
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 two​days, calculate the gain or loss
thod. Bangkok​Instruments' translated balance sheet using the current rate method is shown​here,
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
prior​years, translated to exchange rates in each year.
​(b) Translated into dollars at the same rate as before depreciation of the baht.
​(c) Under the temporal​method, 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 or​loss? Enter a positive number for a gain and negative for a loss. -654268

0
-654268

s the amount of translation gain or​loss? 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 rate​method, because of the different exchange rates used against net plant and equipment and the inve
all assets are exposed under that​method, 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

$500,000 45.33 $375,028


1794118 45.33 1345687
695652 23 695652
2751918 26.53 2751918
— ?
$5,741,688 $5,315,311

e cumulative sum of additions to retained earnings of all

epreciation of the baht.


oss) would be closed into retained earnings through the
em as shown here.
Translation Gain (Loss) = CTA On April 1 - CTA On March 31

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

Translation Gain (Loss) = CTA On April 1 - CTA On March 31


Translation Gain (Loss) = 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

d equipment and the inventory line items.


nventory at relevant historical exchange rates.
tocks - Retain Earnings
cks - Retain Earnings

mon Stocks - Retain Earnings

tocks - Retain Earnings


cks - Retain Earnings
Question 5 Bangkok​Instruments, Ltd.(B). Bangkok​Instruments, 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
including copper - its business has begun to grow rapidly. Sales are primarily to multinational companies
Bangkok​Instruments' balance sheet in thousands of Thai bahts​(B) as of March 31 is shown in the popup

Assets Liabilities & Net Worth


Cash 23000000 Accounts payabl 17000000
Accounts receivable 35000000 Bank loans 61000000
Inventory 50000000 Common stock 16000000
Net plant & equipment 59000000 Retained earning 73000000
Total 167000000 167000000

Exchange rates for translating Bangkok​Instruments' balance sheet into U.S. dollars​are:
Assumptions
April 1 exchange​rate, after​25% devaluation.
March 31 exchange​rate, before​25% 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. Bangkok​Instruments' tran
and the one using the temporal method is shown​here. 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
prior​years, 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 rate​method, 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 translation​loss, 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 the​drop-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 popup​window:

U.S. dollars​are:
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 two​days, calculate the gain or loss
thod. Bangkok​Instruments' translated balance sheet using the current rate method is shown​here,
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
prior​years, translated to exchange rates in each year.
​(b) Translated into dollars at the same rate as before appreciation of the baht.
​(c) Under the temporal​method, 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 or​loss? Enter a positive number for a gain and negative for a loss. 506238

0
506238

s the amount of translation gain or​loss? 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 rate​method, because of the different exchange rates used against net plant and equipment and the inve
all assets are exposed under that​method, 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

$529,412 28.33 $635,369


1823529 28.33 2188493
833333 24 833333
2419118 27.28 2419118
— ?
$5,605,392 $5,964,468

e cumulative sum of additions to retained earnings of all

ppreciation of the baht.


oss) would be closed into retained earnings through the
em as shown here.
Translation Gain (Loss) = CTA On April 1 - CTA On March 31

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

Translation Gain (Loss) = CTA On April 1 - CTA On March 31


Translation Gain (Loss) = 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

d equipment and the inventory line items.


nventory at relevant historical exchange rates.
tocks - Retain Earnings
cks - Retain Earnings

mon Stocks - Retain Earnings

tocks - Retain Earnings


cks - Retain Earnings
Question 1 Mauna Loa Macadamia. Mauna Loa​Macadamia, a macadamia nut subsidiary of​Hershey's with plantations on
The Japanese market is its biggest export​market, with average annual sales invoiced in yen to Japanese custom
Sales are relatively equally distributed throughout the year. They show up as a yen 30,000,000 account receivab
Monthly cash collections are typically yen 120,000,000. Mauna Loa would like to hedge its yen​receipts, but it h
It does not want to use options because they are considered to be too expensive for this particular purpose. ​Th

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%

a. How much should Mauna Loa borrow in U.S.​dollars?

b. What should be the terms of payment on the yen​loan? ​(Select the best choice​below.)
A.The loan should be repaid out of the monthly cash​flow, with payments on principal only. The interest paym
B.Mauna Loa should borrow yen 30,000,000 accounts receivable to cover its accounting​exposure, not only bor
C.The loan should be repaid out of the monthly cash​flow, 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 in​Hilo, 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 yen​receipts, 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

12096000 Loan Amount = (Monthly Cash Flow * 12) * (1 + A

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.

e annual interest rate on the loan is 5.00​%.

nthly Cash Flow * 12) * (1 + Annual Interest Rate) * (1 / Exchnage Rate)

erest upfront.
Question 2 Acuña Leather Goods. DeMagistris Fashion​Company, based in New York​City, imports leather coats from
When the peso lost its parity with the U.S. dollar in January​2002, it collapsed in value to Ps4.0​/$ by Oct
Since both DeMagistris and​Acuña wanted to continue their longtime​relationship, they agreed on a​risk
DeMagistris will pay based on the spot rate. If the exchange rate falls outside this​range, 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​/$, what will be the peso export sales of​Acuña Leather Goods to DeMagistris Fashion​Company
City, imports leather coats from​Acuña Leather​Goods, a reliable and longtime​supplier, based in Buenos​Aires, Argentina. Payment is in Arg
sed in value to Ps4.0​/$ by October 2002. The outlook was for a further decline in the​peso's value.
tionship, they agreed on a​risk-sharing arrangement. As long as the spot rate on the date of an invoice is between​Ps3.5/$ and​Ps4.5/$,
de this​range, they will share the difference equally with​Acuña Leather Goods. The​risk-sharing agreement will last for six​months,
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 to​DeMagistris? 1217391 Cost Of Imports = (Contracted Cost Of Imports) / (To

DeMagistris Fashion​Company? 7000000


res, Argentina. Payment is in Argentine pesos.

etween​Ps3.5/$ and​Ps4.5/$,
nt will last for six​months,
​/$ 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 as​given, Manitowoc Crane faces a pricing decision in the face of the impending d
in which case Chinese volume will not​change; or​(2) maintain the same dollar​price, 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 unit​volume, what will be the​firm's gross​

STEP 1 Calculate Manitowoc Crane Sales Revenue

STEP 2 Calculate Manitowoc Crane Direct Costs

If Manitowoc Crane maintains the same dollar​price, raises the yuan price in China to offset the​devalua
and experiences a​10% drop in unit​volume, what will be the​firm's gross​profits?
Drop In Unit Volume 90%

b. Which do you​recommend? ​(Select from the​drop-down menu.)


Case 2 is better because it yields higher profits.
quipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of ​$24,000 each.
ong Kong advisory service predicts the renminbi will drop in value next week to Yuan8.60​/$, after which it will remain unchanged for at lea
sion in the face of the impending devaluation. It may either​(1) maintain the same yuan price and in effect sell for fewer​dollars,
e dollar​price, raise the yuan price in China to offset the​devaluation, and experience a​10% drop in unit volume. Direct costs are​75% of th

ume, what will be the​firm's gross​profits? 40465116 Gross Profits = Sales Revenue - Dir

220465116 Sales Revenue = (Dollar Price Per U

180000000 Direct Costs = (Dollar price Per Uni

rice in China to offset the​devaluation, 54000000 Gross Profits = Sales Revenue - Dir

216000000 Sales Revenue = Dollar Price Per U

162000000 Direct Costs = (Dollar price Per Uni

CASE 2
4,000 each.
main unchanged for at least a decade.
fewer​dollars,
Direct costs are​75% of the U.S. sales price.

fits = Sales Revenue - Direct Costs

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

fits = Sales Revenue - Direct Costs

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 as​given, Manitowoc C
It may either​(1) maintain the same yuan price and in effect sell for fewer​dollars, in which case Chinese
raise the yuan price in China to offset the​devaluation, and experience a​10% drop in unit volume. Direct

​ dditionally, financial management believes that if it maintains the same yuan sales​price, volume will in
A
At the end of 8​years, 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 dollar​price, volume will increase at only 1
units.​Again, dollar costs will not​change, and at the end of eight years Manitowoc Crane will stop expor
Given these​considerations, what should be​Manitowoc's pricing​policy?

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 fewer​dollars, the annual sales
The direct cost per unit is​75% of the​sales, 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 following​table: ​(Round to the nearest​dollar.)
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
f​Manitowoc's weighted average cost of capital is 15​%, what is the cumulative present value of the​firm'
​(Round to the nearest​dollar.)

CASE 2
If Manitowoc Crane maintains the same dollar​price, raises the yuan price in China to offset the​devalua
The direct cost per unit is​75% of the​sales, or $ 23,000 * 0.75 = $17,250 and the sales volume in year 1 i
​(Round to the nearest​dollar.)
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 following​table: ​(Round to the nearest​dollar.)
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

f​Manitowoc's weighted average cost of capital is 15​%, what is the cumulative present value of the​firm'
​(Round to the nearest​dollar.)

What should be​Manitowoc's pricing​policy? ​(Select from the​drop-down menu.)


Case 2 is better because it yields higher profits.
ment to several Chinese dock facilities. Sales are currently 14,000 units per year at the yuan equivalent of ​$23,000
Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.30​/$,
orecast as​given, Manitowoc Crane faces a pricing decision in the face of the impending devaluation.
dollars, in which case Chinese volume will not​change; or​(2) maintain the same dollar​price,
% drop in unit volume. Direct costs are​75% of the U.S. sales price.

uan sales​price, 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 year​eight, 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​%.

wer​dollars, 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 following​table: ​(Round to the nearest​dollar.)
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

und to the nearest​dollar.)


Year 6 Year 7 Year 8
22547 24802 27282 Sales Volume (Units) = Current Sales Volume * Change In Uni
20774 20774 20774 Sale Price Per Unit = (Yuan Equivalent * Current Exchnage Rat
468398650.3226 515238515.355 566762366.89032 Total Sales Revenue = Sales Volume In Unit * Sales Price Per U
17250 17250 17250 Direct Cost Per Unit = (Yuan Equivalent * Direct Cost Percenta
388938165 427831982 470615180 Total Direct Costs = Sales Volume In Unit * Direct Cost per Un
79460485 87406534 96147187 Gross Profit = Total Sales Revenue - Total Direct Costs
tive present value of the​firm's gross​margin? 295299100 PV Case 1 = CF1/(1+K)+CF1/(1+K)2+CF1/(1+K)3+CF1/(1+K)4+CF

n China to offset the​devaluation, and experiences a​10% drop in unit​volume, 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 following​table:

Year 2 Year 3 Year 4


12726 12853 12982 Sales Volume (Units) = Current Sales Volume * (1 + Change in
23000 23000 23000 Sale Price Per Unit = Yuan Equivalent
292698000 295624980 298581230 Total Sales Revenue = Sales Volume In Unit * Sales Price Per U
17250 17250 17250 Direct Cost Per Unit = (Yuan Equivalent * Direct Cost Percenta
219523500 221718735 223935922 Total Direct Costs = Sales Volume In Unit * Direct Cost per Un
73174500 73906245 74645307 Gross Profit = Total Sales Revenue - Total Direct Costs

und to the nearest​dollar.)


Year 6 Year 7 Year 8
13243 13375 13509 Sales Volume (Units) = Current Sales Volume * (1 + Change in
23000 23000 23000 Sale Price Per Unit = Yuan Equivalent
304582713 307628540 310704825 Total Sales Revenue = Sales Volume In Unit * Sales Price Per U
17250 17250 17250 Direct Cost Per Unit = (Yuan Equivalent * Direct Cost Percenta
228437034 230721405 233028619 Total Direct Costs = Sales Volume In Unit * Direct Cost per Un
76145678 76907135 77676206 Gross Profit = Total Sales Revenue - Total Direct Costs

tive present value of the​firm's gross​margin? 334311325 PV Case 2 = CF1/(1+K)+CF1/(1+K)2+CF1/(1+K)3+CF1/(1+K)4+CF

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 following​table:

Sales Volume * (1 + Change in Unit Volume With A Chnage In Yuan Price (Increase))

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 * (1 + Change in Unit Volume With A Chnage In Yuan Price (Increase))

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
Question 5 Rolls-Royce Turbine Engines. ​Rolls-Royce is struggling with its pricing strategy with a number of its majo
Since​Rolls-Royce is a British company with most manufacturing of the Airbus engines in the United​King
But in the period shown in the popup​window, 2007 - ​2009, the pound steadily weakened against the eu
Rolls-Royce has traditionally denominated its sales contracts with Airbus in​Airbus' home​currency, the e

a. Compute the sales prices per unit of engine in euros for the​three-year period in the following​table: ​(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

Date 3Q 2008 4Q 2008


Price (Millions of Pounds, £) 22.45 22.45
Spot Rate (Euro = 1.00 Pound) 1.2589 1.1925
Price (Millions Of Euro, €) 28.26 26.77

Assuming each​Rolls-Royce engine marketed to Airbus is initially priced at ​£22.45 million​each, how has
(Select the best​response.)
A.The price of the engine in euros has decreased over the​three-year period due to the appreciation of
B.The price of the engine in euros has increased over the​three-year period due to the appreciation of th
C.The price of the engine in euros has increased over the​three-year period due to the depreciation of th
D.The price of the engine in euros has decreased over the​three-year period due to the depreciation of t

b. Complete the table​below: ​(Round to two decimal​places.)


Date 1Q 2007 1Q 2008
Price (In Millions of Pounds, £) 22.45 22.45
Spot Rate (€/£) 1.4921 1.3176
Price (In Millions Of Euro, €) 33.50 29.58
Sales Volume (Engines) 200 220
Total Coat To Airbus (Millions Of €) 6,700 6,508
Total Revenue To RR (Millions Of £) 4,490 4,939

What is the cumulative percentage change in the price of the engine in euros for the​two-year period? ​(
A.20.00​%
B.-26.21​%
C.-11.45​%
D.0.00​%

c. If the price elasticity of demand for​Rolls-Royce turbine sales to Airbus is relatively​inelastic, and the pric
what does this price change mean for​Rolls-Royce's total sales revenue on sales to Airbus of this​engine?
​"The appreciation of the euro reduces the cost of Airbus and thus increases the sales​volume,
which in turn increases the total sales revenue for​Rolls-Royce in spite of the fact that the price of the en
The above statement is TRUE. ​(Select from the​drop-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.Neither​Rolls-Royce nor Airbus.
B.Only Airbus.
C.Both​Rolls-Royce and Airbus.
D.Only​Rolls-Royce.
egy with a number of its major customers in Continental​Europe, particularly Airbus.
us engines in the United​Kingdom, costs are predominantly denominated in British pounds.
adily weakened against the euro.​
​Airbus' home​currency, the euro. After completing the table answer the following​questions:

iod in the following​table: ​(Round to two decimal​places.)


3Q 2007 4Q 2007 1Q 2008 2Q 2008
22.45 22.45 22.45 22.45
1.4676 1.4113 1.3176 1.2606
32.95 31.68 29.58 28.30 Price = Price (Price (Millions of Pounds, £) * Spot Rate (Euro = 1.00

1Q 2009 2Q 2009 3Q 2009 4Q 2009


22.45 22.45 22.45 22.45
1.1011 1.1391 1.1474 1.1086
24.72 25.57 25.76 24.89 Price = Price (Price (Millions of Pounds, £) * Spot Rate (Euro = 1.00

£22.45 million​each, how has the price of that engine changed over the period shown when priced in euros at the current spot ​rate?  ​

od due to the appreciation of the euro over the period.


d due to the appreciation of the euro over the period.
d due to the depreciation of the euro over the period.
d due to the depreciation of the euro over the period.

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%

os for the​two-year period? ​(Select the best​response.)

elatively​inelastic, and the price of the engine in British pounds never changes over the​period,
sales to Airbus of this​engine?
s the sales​volume, TRUE
he fact that the price of the engine in British pounds never​changes."
ears shown in the table in part b above. Who has benefitted the most from the exchange rate ​changes? ​(Select the best​response.)
* Spot Rate (Euro = 1.00 Pound)

* Spot Rate (Euro = 1.00 Pound)

current spot ​rate?  ​


he best​response.)
Question 1 ​ anado's Cost of Capital. Maria​Gonzalez, Ganado's Chief Financial​Officer, estimates the​risk-free rate t
G
the international beta is estimated at 0.72​, and the​company's capital structure is now 50​% debt. The ex
and the expected return on a larger globally integrated equity market portfolio is 8.20 %. The​before-tax
bank debt is 8.60​% and the​company's effective tax rate is 42​%. For both the domestic CAPM and​ICAPM

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

a. Using the domestic​CAPM, what is​Ganado's cost of​equity?

Using the​ ICAPM, what is​ Ganado's cost of​ equity?

b. Using the domestic​CAPM, what is​Ganado's after-tax cost of​debt?

Using the​ICAPM, what is​Ganado's after-tax cost of​debt?


Assuming the same cost of current​debt, Ganado's ICAPM cost of debt is the same as the domestic cost

c. Using the domestic​ CAPM, what is​ Ganado's weighted average cost of​ capital?

Using the​ICAPM, what is​Ganado's weighted average cost of​capital?


Officer, estimates the​risk-free rate to be 3.00 %​, the​company's credit risk premium is 3.80​%, the domestic beta is estimated at 0.96​,
tal structure is now 50​% debt. The expected rate of return on the market portfolio held by a​well-diversified domestic investor is 9.10​%
et portfolio is 8.20 %. The​before-tax cost of debt estimated by observing the current yield on​Ganado's outstanding bonds combined with
both the domestic CAPM and​ICAPM, calculate the​following:

Values
3.00% where
3.80% ke = Expected ​(required) rate of return on equity
0.96 krf = Rate of interest on​risk-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%

8.86% ke = krf + Bj *( Km - krf)

6.74% keglobal = krfg + Bjg * ( Kmg - krfg)

4.99% Kd *(1 - t)

4.99% Kd *(1 - t)
ebt is the same as the domestic cost of debt of 4.90%

6.92% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

5.87% KWACC ICAMP = Keglobal *(E/(E+D)) + Kd * (1 - t) (D/(D+E))


s estimated at 0.96​,
stic investor is 9.10​%
ng bonds combined with
Question 2 Ganado and Equity Risk Premiums. Maria​Gonzalez, Ganado's Chief Financial​Officer, estimates the​risk
the international beta is estimated at 0.84​, and the​company's capital structure is now 80​% debt. The​be
bank debt is 8.20​% and the​company's effective tax rate is 42​%. Calculate both the CAPM and ICAPM we

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 domestic​CAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk pre
​(Round to two decimal​places.)
Equity Risk premium 8.30%
STEP 1 Calculate Ganado's cost of Capital

Using the​ICAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk premium is 8
​(Round to two decimal​places.)
Equity Risk premium 8.30%
STEP 1 Calculate Ganado's International cost of​ equity?

b. Using the domestic​CAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk pre
​(Round to two decimal​places.)
Equity Risk premium 7.40%
STEP 1 Calculate Ganado's cost of Capital

Using the​ICAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk premium is 7
​(Round to two decimal​places.)
Equity Risk premium 7.40%
STEP 1 Calculate Ganado's International cost of​ equity?

c. Using the domestic​CAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk pre
​(Round to two decimal​places.)
Equity Risk premium 5.40%
STEP 1 Calculate Ganado's cost of Capital

Using the​ICAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk premium is 5
(​ Round to two decimal​places.)
Equity Risk premium 5.40%
STEP 1 Calculate Ganado's International cost of​ equity?

d. Using the domestic​CAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk pre
​(Round to two decimal​places.)
Equity Risk premium 4.30%
STEP 1 Calculate Ganado's cost of Capital

Using the​ICAPM, what is​Ganado's weighted average cost of capital if the​firm's equity risk premium is 4
​(Round to two decimal​places.)
Equity Risk premium 4.30%
STEP 1 Calculate Ganado's International cost of​ equity?
​Officer, estimates the​risk-free rate to be 3.70%​, the​company's credit risk premium is 3.90​%, the domestic beta is estimated at 1.09​,
re is now 80​% debt. The​before-tax cost of debt estimated by observing the current yield on​Ganado'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 on​risk-free bonds
betaj = Coefficient of systematic risk for the firm​(beta)
km = Expected ​(required) rate of return on the market portfolio of stocks

if the​firm's equity risk premium is 8.30%​? 6.35% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

12.75% ke = krf + Bj *( EMRP)

m's equity risk premium is 8.30​%? 5.94% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

10.67% keglobal = krfg + Bjg * ( Kmg - krfg)

if the​firm's equity risk premium is 7.40 %​? 6.16% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

11.77% ke = krf + Bj *( EMRP)

m's equity risk premium is 7.40​%? 5.79% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

9.92% keglobal = krfg + Bjg * ( Kmg - krfg)

if the​firm's equity risk premium is 5.40 %​? 5.72% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

9.59% ke = krf + Bj *( EMRP)

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 the​firm's equity risk premium is 4.30 %​? 5.48% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

8.39% ke = krf + Bj *( EMRP)

m's equity risk premium is 4.30​%? 5.27% KWACC ICAMP = Keglobal * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

7.31% keglobal = krfg + Bjg * ( Kmg - krfg)


estimated at 1.09​,
bonds combined with
Question 3 Thunderhorse Oil. Thunderhorse Oil is a U.S. oil company. Its current cost of debt is 6.70​%, and the​10-y
The expected return on the market portfolio is 8.00​%. The​company's effective tax rate is 30​%. Its optim

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 on​ri
Corporate Tax Rate 30% betaj = Coefficient of system
Debt 60% km = Expected ​(required) r
Equity 40%

a. If​Thunderhorse's beta is estimated at 0.90​, what is​Thunderhorse's weighted average cost of​capital?
Beta 0.90
STEP 1 Calculate Ganado's cost of Capital

b. If​Thunderhorse's beta is estimated at 0.60​, significantly lower because of the continuing profit prospect
what is​Thunderhorse's weighted average cost of​capital?
Beta 0.60
STEP 1 Calculate Ganado's cost of Capital
of debt is 6.70​%, and the​10-year U.S. Treasury​yield, the proxy for the​risk-free rate of​interest, is 3.80​%.
ctive tax rate is 30​%. Its optimal capital structure is 60​% debt and 40​% equity.

ke = Expected ​(required) rate of return on equity


krf = Rate of interest on​risk-free bonds
betaj = Coefficient of systematic risk for the firm​(beta)
km = Expected ​(required) rate of return on the market portfolio of stocks

ed average cost of​capital? 5.85% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+

7.58% ke = krf + Bj * ( Km - krf)

the continuing profit prospects in the global energy​sector, 5.34% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+

6.32% ke = krf + Bj * ( Km - krf)


* (E/(E+D)) + Kd * (1 - t) (D/(D+E))

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 market​returns, indexed back to Swiss​francs, stands at 8.97​%. ​Nestlé's corporate treasur
but its global beta​(against the larger global equity market​portfolio) 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 on​risk-fre
Domestic Beta 0.935 betaj = Coefficient of systematic
International Beta 0.525 km = Expected ​(required) rate o

a. What is​Nestlé's cost of equity based on the domestic portfolio for a Swiss​investor? 7.89%

b. What is​Nestlé's cost of equity based on a global portfolio for a Swiss​investor? 4.95%
nalysis. As a result of extraordinary actions by the Swiss Central​Bank,
The Swiss equity markets have been averaging 8.40​% ​returns, while the Financial
estlé's corporate treasury staff has estimated the​company's domestic beta at 0.935​,

xpected ​(required) rate of return on equity


ate of interest on​risk-free bonds
oefficient of systematic risk for the firm​(beta)
pected ​(required) rate of return on the market portfolio of stocks

ke = krf + Bj * ( Km - krf)

keglobal = krfg + Bjg * ( Kmg - krfg)


Question 5 Corcovado Pharmaceuticals. Corcovado​Pharmaceutical's cost of debt is 7.00​%. The​risk-free rate of inte
​Corcovado's effective tax rate is 40​%. Its optimal capital structure is 60 % debt and 40​% equity.

Assumptions Values where


Cost of Debt 7.00% ke = Expected ​(required)
Risk-Free Rate Of Interest 4.00% krf = Rate of interest on​ri
Expected Rate Of Return (Domestic Investors) 8.50% betaj = Coefficient of system
Corporate Tax Rate 40% km = Expected ​(required) r
Debt 60%
Equity 40%

a. If​Corcovado's beta is estimated at 1.70​, what is its weighted average cost of​capital?
Beta 1.70
STEP 1 Calculate Ganado's cost of Capital

b. If​Corcovado's beta is estimated at 1.40​, significantly lower because of the continuing profit prospects in
what is its weighted average cost of​capital?
Beta 1.40
STEP 1 Calculate Ganado's cost of Capital
00​%. The​risk-free rate of interest is 4.00 %. The expected return on the market portfolio is 8.50​%.
ebt and 40​% equity.

ke = Expected ​(required) rate of return on equity


krf = Rate of interest on​risk-free bonds
betaj = Coefficient of systematic risk for the firm​(beta)
km = Expected ​(required) rate of return on the market portfolio of stocks

7.18% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

11.65% ke = krf + Bj * ( Km - krf)

continuing profit prospects in the global pharma​sector, 6.64% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

10.30% ke = krf + Bj * ( Km - krf)


+ Kd * (1 - t) (D/(D+E))

+ Kd * (1 - t) (D/(D+E))
Question 6 WestGas​Conveyance, Inc. WestGas​Conveyance, 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 following​costs, also in
Each increment of cost would be influenced by the total amount of capital raised. That​is, if WestGas firs
additional debt beyond this amount would cost 11​% in the United States and 9​% in Europe. The same re

Costs of Raising Capital in the Market Cost of Domestic Equity


Up to $40 million of new capital 12%
$41 million to $80 million of new capital 17%
Above $80 million 23%

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 new​capital?
SECOND $40,000,000

What is the lowest average cost of capital for the third​$40 million of new​capital?
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 new​capital?

c. What will be the weighted average cost of capital for the​$60 million​expansion?
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 component​costs, each, of debt and equity if raised 50​% by debt and 50​% by equity.
ed in Europe at the following​costs, also in multiples of​$20 million, while maintaining the 50​/50 capital structure.
nt of capital raised. That​is, 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.

Cost of Domestic Debt Cost of European Equity Cost of European Debt


8% 14% 7%
11% 15% 9%
15% 25% 17%

Values where
$120,000,000 ke = Expected ​(required) rate of return on equity
50% krf = Rate of interest on​risk-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

new capital is 8.17% KWACC1 = Ke Domestic * (E/(E+D)) + Kd European * (1 - t)

million of new​capital? 10.29% KWACC2 = Ke European * (E/(E+D)) + Kd European * (1 - t

lion of new​capital? 16.15% KWACC3 = Ke Domestic * (E/(E+D)) + Kd Domestic * (1 - t)

million​ expansion? 11.54% KWACC = KWACC1 * ($40,000,000 / $120,000,000)

e the weighted average cost of capital 10.29% KWACC2 = Ke European * (E/(E+D)) + Kd European * (1 - t

million​expansion? 8.88% KWAAC = KWAAC1 * ($40,000,000/$60,000,000) +


al structure that is 50​% debt and 50​% equity.

% by equity.

with an additional​$20 million of​equity,

the market portfolio of stocks

/(E+D)) + Kd European * (1 - t) (D/(D+E))

/(E+D)) + Kd European * (1 - t) (D/(D+E))

/(E+D)) + Kd Domestic * (1 - t) (D/(D+E))

000,000 / $120,000,000) + KWACC2 * ($40,000,000 / $120,000,000) + K WACC3 * ($40,000,000 / $120,000,000)

/(E+D)) + Kd European * (1 - t) (D/(D+E))

000,000/$60,000,000) + K WAAC2 * ($20,000,000 / $60,000,000)


Question 7 Kashmiri's Cost of Capital. Kashmiri is the largest and most successful specialty goods company based i
but is considering establishing both manufacturing and distribution facilities in the United States throug
Goldman Sachs and Bank of New​York, for estimates of what its costs of capital would be several years i
Using the assumptions by the two different advisors in the popup​window, calculate the prospective cos
Goldman
Assumptions Sachs
between security and
market 0.90
deviation of Kashmiri's
returns 24.00%
deviation of market's
return 18.00%
Risk-free rate of
interest
cost of debt in U.S. 3.00%
market 7.50%
Estimate of market
return, forward-looking 9.00%
Corporate tax rate 35%
Proportion of debt 35%
Proportion of equity 65%

a. What is the​after-tax cost of debt estimated by Goldman Sachs for​Kashmiri?

What is the​after-tax cost of debt estimated by Bank of New York for​Kashmiri?

What is the cost of equity estimated by Goldman Sachs for​ Kashmiri?


Beta estimated by Goldman Sachs 1.2

What is the cost of equity estimated by Bank of New York for​ Kashmiri?


Beta estimated by Bank Of New York 1.2

What is the WACC estimated by Goldman Sachs for​ Kashmiri?

What is the WACC estimated by Bank of New York for​Kashmiri?


pecialty goods company based in​Bangalore, India. It has not yet entered the North American​marketplace,
ities in the United States through a wholly owned subsidiary. It has approached two different investment banking ​advisors,
capital would be several years into the future when it planned to list its American subsidiary on a U.S. stock exchange.
ow, calculate the prospective costs of​debt, equity, and the WACC for Kashmiri​(U.S.).
Bank of
New York where
0.85 ke = Expected ​(required) rate of return on equity
30.00% krf = Rate of interest on​risk-free bonds
22.00% betaj = Coefficient of systematic risk for the firm​(beta)
3.00% km = Expected ​(required) rate of return on the market portfolio of stocks
7.80%
12.00% betaj = measure of systematic risk for security j
35% Pjm = correlation between security j and the market
40% σj = standard deviation of the return on firm j
60% σm = standard deviation of the market return

4.88% Kd * (1 - t)

5.07% Kd * (1 - t)

10.20% ke = krf + Bj * ( Km - krf)

13.43% ke = krf + Bj * ( Km - krf)

8.34% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))

10.09% KWACC = Ke * (E/(E+D)) + Kd * (1 - t) (D/(D+E))


ing ​advisors,
Question 8 Cargill's Cost of Capital. Cargill is generally considered to be the largest privately held company in the wor
over the past​five-year period. Although the company does not have publicly traded​shares, it is still extre
On new investment proposals. Assuming a​risk-free rate of 4.50​%, an effective tax rate of 38​%, and a mar
guesstimate of what you believe a comparable WACC would be for Cargill. As shown in the popup​window
fall between say 0.80 and 1.00. If the higher degree of international sales was interpreted as increasing ​ris
Thus, an estimate of 0.90 beta for Cargill sounds reasonable.

Assumptions
Risk-Free Rate Of Interest
Corporate Tax Rate
Market Risk Premium
Corporate Tax Rate
Beta

a. Using the​ CAPM, what is company​ A's WACC?


STEP 1 Company A Cost of equity

Using the​ CAPM, what is company​ B's WACC?


STEP 1 Company B Cost of equity

Using the​ CAPM, what is​ Cargill's WACC?


STEP 1 Cargill's Cost of equity
ivately held company in the world. Headquartered in​Minneapolis, Minnesota, the company has been averaging sales of over ​$114 billion
cly traded​shares, it is still extremely important for it to calculate its weighted average cost of capital properly in order to make rational de
ctive tax rate of 38​%, and a market risk premium of 5.50​%, estimate the weighted average cost of capital first for companies A and​B, and
. As shown in the popup​window, if we take the approach that the beta for Cargill has to pick up all the incremental​information, the beta
was interpreted as increasing ​risk, beta would be on the higher​end; yet being a commodity firm in the current​market, its beta would rare

Values Company A Company B


4.50% Company sales $9.5 billion $47 billion
38% Company's beta 0.82 0.70
5.50% Credit rating
Weighted average AA A
40% cost of debt 6.87% 7.12%
0.90 Debt to total capital
International 31% 42%
sales/Sales 11% 34%

7.54% KWACC = Ke * (1 - (E)/(D)) + Kd * (1 - t) (D)/(E)


9.01% ke = krf + Bj * ( Km - krf)

6.70% KWACC = Ke * (1 - (E)/(D)) + Kd * (1 - t) (D)/(E)


8.35% ke = krf + Bj * ( Km - krf)

8.09% KWACC = Ke * (1 - (E)/(D)) + Kd * (1 - t) (D)/(E)


9.45% ke = krf + Bj * ( Km - krf)
ging sales of over ​$114 billion per year
rly in order to make rational decisions
st for companies A and​B, and then make a​
emental​information, the beta would then
ent​market, its beta would rarely surpass 1.0.​

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, a​o
what is the effective​after-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 effective​after-tax cost of​debt
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 effective​after-tax cost of​debt
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 effective​after-tax cost of​debt
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​/$, what is the effective​after-tax cost of​debt
Exchange Rate 1.5920
STEP 1 Find the percentage change in the value of the Swiss franc versus the U.S. dollar​
STEP 2 Find the total expense using the nominal interest rate and the percentage change in the exchange ​rate
monstrated that a firm borrowing in a foreign currency could potentially end up paying a very different effective rate
cipal of SF1.7 ​million, a​one-year period, an initial spot rate of SF1.5000​/$, a 4.522% cost of​debt, and a 32​% tax​rate,
ompany if the exchange rate at the end of the period​was:

tive​after-tax cost of​debt? 3.0749600% Kd$ * (1 - t)

0.0000% S = (Beginning Exchnage Rate - Ending Exchnage Rate) / (Ending Exchna


ge in the exchange ​rate 4.5220% Kd$ = ((1 + KdSF) * (1 + S)) - 1

tive​after-tax cost of​debt? 5.5258% Kd$ * (1 - t)

3.4483% S = (Beginning Exchnage Rate - Ending Exchnage Rate) / (Ending Exchna


ge in the exchange ​rate 8.1262% Kd$ = ((1 + KdSF) * (1 + S)) - 1

tive​after-tax cost of​debt? 8.3699% Kd$ * (1 - t)

7.4499% S = (Beginning Exchnage Rate - Ending Exchnage Rate) / (Ending Exchna


ge in the exchange ​rate 12.3087% Kd$ = ((1 + KdSF) * (1 + S)) - 1

tive​after-tax cost of​debt? -1.0324% Kd$ * (1 - t)

-5.7789% S = (Beginning Exchnage Rate - Ending Exchnage Rate) / (Ending Exchna


ge in the exchange ​rate -1.5182% Kd$ = ((1 + KdSF) * (1 + S)) - 1
hnage Rate) / (Ending Exchnage Rate)

hnage Rate) / (Ending Exchnage Rate)

hnage Rate) / (Ending Exchnage Rate)

hnage Rate) / (Ending Exchnage Rate)


Question 2 McDougan Associates​(USA). McDougan​Associates, a​U.S.-based investment​partnership, borrows €90,
and interest is 6.450​% per​annum, paid annually in euros. The euro is expected to depreciate​vis-à-vis th

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 the​euro-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to four decimal​places.)

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)

Expected exchnage Rate $/€ 1.3469 1.29976

Dollar equivalent of euro-denominated cash flow 121221000 (7545098)

What is the effective cost of this loan for​ McDougan? ​(Round to two decimal​places.)
nt​partnership, borrows €90,000,000 at a time when the exchange rate is ​$1.3469​/euro. The entire principal is to be repaid in three​years
ted to depreciate​vis-à-vis the dollar at 3.5​% per annum. What is the effective cost of this loan for​McDougan?

minated debt for years 0 through 3. Enter a positive number for a cash inflow and negative for a cash outflow.
o four decimal​places.)

Year 2 Year 3

(5805000) (5805000) Interest Payment = -Principal (1 + Annual Interest Rate)


(90000000)
(5805000) 95805000

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

2.72% IRR = IRR (Cash Flow in $)


$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
al is to be repaid in three​years,

- Expected Depreciation)

Total Cash Flow of Euro-Denominated Debt * Expected Exchange Rate

R)2 + (CF3)/(1+IRR)3
Question 3 Morning Star Air​(China). Morning Star​Air, headquartered in​Kunming, 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 in​US$ in one year
STEP 2 Find the cost of repaying the loan in​HK$ in one year
, needs ​US$28,000,000 for one year to finance working capital. The airline has two alternatives for​borrowing:

borrowing U.S. dollars and borrowing Hong Kong ​dollars? 7.9362 S1 = HK$ / US$

30002000 Cost of Repaying The Loan in US$ = Loan Amount


238103074 Cost of Repaying The Loan in HK$ = Loan Amount

INDIFFERENT Cost of repaying the Loan in US$ = Cost of Repayi


e Loan in US$ = Loan Amount in US$ * (1 + U.S. Interest Rate)
e Loan in HK$ = Loan Amount In HK$ * (1 + Hong Kong Interest Rate)

Loan in US$ = Cost of Repaying the Loan in HK$ * S1


Question 4 Pantheon​Capital, S.A. If Pantheon​Capital, S.A. is raising funds via a​medium-term euronote with the fo
Coupon​rate: 7​% payable semiannually on June 30 and December 31
Date of​issuance: February​28, 2011
​Maturity: December​31, 2013
Note​: the present value of the cash flows is essentially the face value of the note and that any difference

The value of a note is the total present value of all its future cash flows discounted at the​firm's cost of c
​(Round the cash flows to the nearest cent and the discount factor to four decimal​palces.)

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 following​characteristics, how much in dollars will Pantheon receive for each ​$1,000 note​sold?

of the note and that any difference is due to intermediate rounding.

ws discounted at the​firm's cost of capital. The value of the​medium-term euronote can be calculated in the following​table:  
four decimal​palces.)

Cumulative Days Discount Discounted Cash


From Start Cash Flow Factors Flows
122 23.72 1.0236 23.18 Cash Flow = Par Value * (Annual Coupon Rate /
302 35.00 1.0594 33.04
482 35.00 1.0965 31.92
662 35.00 1.1349 30.84 Discount Factor = (1 + (Annual Coupon Rate / 2
842 35.00 1.1746 29.80
904 12.06 1.1886 10.14
904 1,000 1.1886 841.33 Discounted Cash Flow = Cash Flow On Payment
1000.24
$1,000 note​sold?

owing​table:  

ue * (Annual Coupon Rate / 2) * (Days Since The Previous Payment Date / 180)

+ (Annual Coupon Rate / 2))^ (Cumulative Days Since Previous Payment Date/180)

w = Cash Flow On Payment Date / Discount Factor


Question 5 Petrol​Ibérico. Petrol​Ibérico, a European gas​company, is borrowing ​$550,000,000 via a syndicated euro
LIBOR for the loan will be reset every six months. The funds will be provided by a syndicate of eight lead
of the principal amount. What is the effective interest cost for the first year if the annual LIBOR is 4.40 ​%

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 decimal​places.)
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 charge​up-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 popup​window, What are the debt and equity proportions

A-Malaysia (In Ringgits) A-Mexico (In Pesos)


Assumptions Values Assumptions Values
Long-term debt 11700000 Long-term debt 27000000
Shareholders' equity 15990000 Shareholders' equity 97500000
In A-Malaysia 4100000 Parent long-term debt 19000000
In A-Mexico 6500000 Common stock 5000000
Malaysia (RM/$) 3.90 Retained earnings 22000000
Mexico (Ps/$) 15.00

a. What is the debt proportion in​Adamantine's consolidated balance​sheet? ​(Round to two decimal​place

What is the equity proportion in​ Adamantine's consolidated balance​ sheet?

STEP 1 Find he​ shareholders' equity


STEP 2 Find the dollar value of Malaysia long-term debt
STEP 3 Find the dollar value of Mexico long-term debt
STEP 4 Find the total long-term debt of the company
parent and wholly owned subsidiaries in Malaysia​(A-Malaysia) and Mexico​(A-Mexico). Selected portions of their​non-consolidated balanc
debt and equity proportions in​Adamantine's consolidated balance​sheet?

(Round to two decimal​places.) 46.85% Debt Portion = Debt / (Debt + Equity)

53.15% Equity Portion = Equity / Equity + Debt

27000000 Shareholders Equity = Common Stocks + Retain Earnings


3000000 Dollar Value of Malaysia Long-Term Debt = Long-Term Debt In Ringgits
1800000 Dollar Value of Mexico Long-Term Debt = Long-Term Debt In Pesos / Ex
23800000 Total Debt = Parent Debt + Malaysia Debt + Mexico Debt
heir​non-consolidated balance​sheets,

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. Grupo​Modelo, a brewery out of Mexico that exports such​well-known var
However, the company evaluates all business​results, including financing​costs, in U.S. dollars. The comp
For all​issues, interest is payable once per​year, at the end of the year. Available alternatives are as​follo

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 the​yen-denominated loan for Grupo​Modelo?
b. Sell​euro-denominated bonds at par yielding 6.90​% per annum. The current exchange rate is ​$1.1930​/eu
What is the effective cost of the​euro-denominated loan for Grupo​Modelo?
c. Sell U.S. dollar bonds at par yielding 5.20​% per annum. What is the effective cost of the​dollar-denomina
d. Which course of action do you recommend Grupo Modelo take and​why?

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 the​yen-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to two decimal​places.)

Year 0 Year 1 Year 2


Cash Flow in ¥ 1060000000 (34980000) (34980000)

Exchange Rate ¥/$ 106.00 103.62 101.29

Cash Flow in $ 10,000,000 -337590 -345355

What is the effective cost of the​ yen-denominated loan for Grupo​ Modelo?

b. Complete the following table to calculate the dollar cost of the​euro-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to four decimal​places.)

Year 0 Year 1 Year 2


Cash Flow in € 8382230 (578374) (578374)

Exchange Rate €/$ 1.1930 1.1668 1.1411

Cash Flow in $ 10,000,000 -674820 -659974


What is the effective cost of the​ Euro-denominated loan for Grupo​ Modelo?

c. Complete the following table to calculate the dollar cost of the​dollar-denominated debt for years 0 thro
​(Round the amount to the nearest whole number and the exchange rate to two decimal​places.)

Year 0 Year 1 Year 2


Cash Flow in $ 10000000 (520000) (520000)

What is the effective cost of the​ Dollar-denominated loan for Grupo​ Modelo?

d. Which course of action do you recommend Grupo Modelo take and​ why? (Select from the​ drop-down
Given the expected exchange rate​changes, the euro-denominated bonds have the lowest​all-in-cost of
hat exports such​well-known varieties as​Corona, Modelo, and​Pacifico, is Mexican by incorporation.​
g​costs, in U.S. dollars. The company needs to borrow ​$10,000,000 or the foreign currency equivalent for four years.
vailable alternatives are as​follows:

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.

ctive cost of the​dollar-denominated loan for Grupo​Modelo?

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 decimal​places.)

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 decimal​places.)

Year 3 Year 4 Principal Proceeds in Euro = Principal / Current Exchange Rate


(578374) (8960604) Annual Interest Payment = -Principal Proceeds in Euro * Yield On Euro Bon

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 decimal​places.)

Year 3 Year 4 Principal Proceeds in Dollar = Debt Principal


(520000) (10520000) Annual Interest Payment = -Debt Principal in Dollar * Yield On Dollar Bond

5.20% IRR = IRR (Cash Flow in $)


$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3

y? (Select from the​ drop-down menu.)


nds have the lowest​all-in-cost of funds for the​Mexico-based company, Grupo Modelo.
r a cash outflow. 

cipal * Current Exchange Rate


eeds in Japanese Yen * Yield On Japanese Bonds

ge Rate / (1 + Yen Appreciation)

sh Flow = Total Cash Flow of Yen-denominated debt / Expected Exchange Rate

(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3

or a cash outflow.

rrent Exchange Rate


eeds in Euro * Yield On Euro Bonds

ge Rate / (1 - Euro Depreciation)

ash Flow = Total Cash Flow of Euro-denominated debt * Expected Exchange Rate
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3

for a cash outflow.

l in Dollar * Yield On Dollar Bonds

(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
Question 8 Grupo Modelo S.A.B. de C.V. Grupo​Modelo, a brewery out of Mexico that exports such​well-known var
However, the company evaluates all business​results, including financing​costs, in U.S. dollars. The comp
For all​issues, interest is payable once per​year, at the end of the year. Available alternatives are as​follo

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 the​yen-denominated loan for Grupo​Modelo?
b. Sell​euro-denominated bonds at par yielding 7.00​% per annum. The current exchange rate is ​$1.1960​/eu
What is the effective cost of the​euro-denominated loan for Grupo​Modelo?
c. Sell U.S. dollar bonds at par yielding 5.00​% per annum. What is the effective cost of the​dollar-denomina
d. Which course of action do you recommend Grupo Modelo take and​why?

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 the​yen-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to two decimal​places.)

Year 0 Year 1 Year 2


Cash Flow in ¥ 1060000000 (31800000) (31800000)

Exchange Rate ¥/$ 106.00 103.92 101.88

Cash Flow in $ 10,000,000 -306000 -312120

What is the effective cost of the​ yen-denominated loan for Grupo​ Modelo?

b. Complete the following table to calculate the dollar cost of the​euro-denominated debt for years 0 throu
(Round the amount to the nearest whole number and the exchange rate to four decimal​places.)

Year 0 Year 1 Year 2


Cash Flow in € 8361204 (585284) (585284)

Exchange Rate €/$ 1.1960 1.1721 1.1486

Cash Flow in $ 10,000,000 -686000 -672280


What is the effective cost of the​ Euro-denominated loan for Grupo​ Modelo?

c. Complete the following table to calculate the dollar cost of the​dollar-denominated debt for years 0 thro
​(Round the amount to the nearest whole number and the exchange rate to two decimal​places.)

Year 0 Year 1 Year 2


Cash Flow in $ 10000000 (500000) (500000)

What is the effective cost of the​ Dollar-denominated loan for Grupo​ Modelo?

d. Which course of action do you recommend Grupo Modelo take and​ why? (Select from the​ drop-down
Given the expected exchange rate​changes, the euro-denominated bonds have the lowest​all-in-cost of
hat exports such​well-known varieties as​Corona, Modelo, and​Pacifico, is Mexican by incorporation.​
g​costs, in U.S. dollars. The company needs to borrow ​$10,000,000 or the foreign currency equivalent for four years.
vailable alternatives are as​follows:

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.

ctive cost of the​dollar-denominated loan for Grupo​Modelo?

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 decimal​places.)

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 decimal​places.)

Year 3 Year 4 Principal Proceeds in Euro = Principal / Current Exchange Rate


(585284) (8946488) Annual Interest Payment = -Principal Proceeds in Euro * Yield On Euro Bon

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 decimal​places.)

Year 3 Year 4 Principal Proceeds in Dollar = Debt Principal


(500000) (10500000) Annual Interest Payment = -Debt Principal in Dollar * Yield On Dollar Bond

5.00% IRR = IRR (Cash Flow in $)


$0.00 Effective Cost = $0 = CF0 + (CF1)/(1+IRR) + (CF2)/(1+IRR)2 + (CF3)/(1+IRR)3

y? (Select from the​ drop-down menu.)


nds have the lowest​all-in-cost of funds for the​Mexico-based company, Grupo Modelo.
r a cash outflow. 

cipal * Current Exchange Rate


eeds in Japanese Yen * Yield On Japanese Bonds

ge Rate / (1 + Yen Appreciation)

sh Flow = Total Cash Flow of Yen-denominated debt / Expected Exchange Rate

(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3

or a cash outflow.

rrent Exchange Rate


eeds in Euro * Yield On Euro Bonds

ge Rate / (1 - Euro Depreciation)

ash Flow = Total Cash Flow of Euro-denominated debt * Expected Exchange Rate
(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3

for a cash outflow.

l in Dollar * Yield On Dollar Bonds

(CF2)/(1+IRR)2 + (CF3)/(1+IRR)3
Question 1 Avon's Foreign-Source Income. Avon is a​U.S.-based direct seller of a wide array of products. Avon mar
it has its interns build a spreadsheet analysis of the following hypothetical subsidiary​earnings/distributi

Assumptions Case 1 Case 2


a Foreign corporate income tax rate 25% 42%
b U.S. corporate income tax rate 36% 36%
c Foreign dividend withholding tax rate 15% 0%
d U.S. ownership in foreign firm 100% 100%
e Dividend payout rate of foreign firm 100% 100%

Foreign Subsidiary Tax Computation


1 Taxable income of foreign subsidiary $3,600,000 $3,600,000
2 Foreign corporate income tax -900,000 -1,512,000
3 Net income available for distribution $2,700,000 $2,088,000
4 Retained earnings 0 0
5 Distributed earnings 2700000 2088000
6 Distribution to U.S. parent company 2700000 2088000
7 Withholding taxes on dividends 405000 0
8 Net remittance to U.S. parent $2,295,000 $2,088,000

U.S. Corporate Tax Computation on Foreign Income


9 Dividend received before withholding $2,700,000 $2,088,000
10 Add back foreign deem-paid tax 900000 1512000
11 Grossed-up foreign dividend $3,600,000 $3,600,000
12 Tentative U.S. liability 1296000 1296000
13 Less credit for foreign taxes
a foreign income taxes paid -900,000 -1,512,000
b foreign withholding taxes paid -405,000 0
c total ($1,305,000) ($1,512,000)
14 Additional U.S. taxes due $0 $0
15 Excess foreign tax credits 9000 216000
16 After-tax income from foreign subsidiary $2,304,000 $2,304,000

a. What is the total tax​payment, foreign and domestic​combined, for this​income? (Round to the nearest

b. What is the effective tax rate paid on this income by the​U.S.-based parent​company? ​(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 leading​beauty, fashion, and home products in more than 100 countries. As part of the training in its corpor
bsidiary​earnings/distribution analysis. Use the tax analysis presented in the popup window for your basic​structure,

me? (Round to the nearest​dollar.) 1305000

mpany? ​(Round to one decimal​place.) 36.3%

​% and there were no withholding taxes on​dividends? ​(Round to the nearest​dollar.) 1512000

% and there were no withholding taxes on​dividends? (Round to one decimal​place.) 42.0%

f the U.S.​corporation? (Round to the nearest dollar.) $1,296,000

the U.S.​corporation? ​(Round to one decimal​place.) 36.0%


of the training in its corporate treasury ​offices,

Total tax Payment = tentative U.S. Liability + Excess Foreign tax Credit

Effective Tax Rate = Total Tax Payment / Gross-up Foreign Dividend

Total tax Payment = tentative U.S. Liability + Excess Foreign tax Credit

Effective Tax Rate = Total Tax Payment / Gross-up Foreign Dividend

Total Tax Payment = Taxable Income * U.S. Income Tax Rate

Effective Tax Rate = Total Tax Payment / Taxable Income


Question 2 Pacific Jewel Airlines​(Hong Kong). Pacific Jewel Airlines is a​U.S.-based air freight firm with a wholly ow
​in which it has estimated the following expected earnings and payout rates for the years 2011-2014. Th
(per the Hong Kong - United States bilateral tax​treaty). The U.S. corporate income tax rate is 40​%. The

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 each​year? (Round to th
c. After estimating the theoretical U.S. tax liability on the expected dividend​(what is often termed​gross-u
d. What is the effective tax rate on this​foreign-sourced income per​year? (Round to one decimal​place.)

Jewel Hong Kong Income Items (millions US$) 2011 2012


Earnings before interest and taxes (EBIT) $10,000 $12,000
Less interest expenses (1,000) $1,200.00
Earnings before taxes (EBT) $9,000 $10,800
Less Hong Kong corporate income taxes 16.5% (1,485) $1,782
Net income $7,515 $9,018
Dividend remitted to U.S. parent 65.0% $4,885 $5,862
Less withholding taxes $0 $0
Net dividend remitted to U.S. parent $4,885 $5,862
Add back proportion of foreign income taxes $965 $1,158
Add back withholding taxes paid $0 $0
Grossed-up dividend for U.S. tax purposes $5,850 $7,020
Theoretical U.S. tax liability 40.0% (2,340) (2,808)
Foreign tax credits (965) (1,158)
Additional U.S. tax due (1,375) (1,650)
After-tax net dividend $3,510 $4,212
Total taxes paid on this income 2340 2808
Income before tax $5,850 $7,020
Effective tax rate 40.0% 40.0%
ght firm with a wholly owned subsidiary in Hong Kong. The​subsidiary, Jewel Hong​Kong, has just completed a​long-term planning report f
r the years 2011-2014. The current Hong Kong corporate tax rate on this category of income is 16.5 ​%. Hong Kong imposes no withholding
ome tax rate is 40​%. The parent company wants to repatriate 65​% of net income as dividends annually.

y for the years 2011-2014 in the following table. (Round to the nearest​dollar.)
t each​year? (Round to the nearest​dollar.)
at is often termed​gross-up in the​U.S.), what is the total dividend after​tax, including all Hong Kong and U.S.​taxes, expected each​year? (R
d to one decimal​place.)

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 San​Francisco,
g imposes no withholding taxes on dividends remitted to U.S. investors​

es, expected each​year? (Round to the nearest​dollar.)


Question 3 Kraftstoff of Germany. Kraftstoff is a​German-based company that manufactures electronic​fuel-injectio
The​firm, like many firms in Germany​today, is revising its financial policies in line with the increasing de
​Kraftstoff's primary problem is that the German corporate income tax code applies a different income t
The​company's earnings before tax​(EBT) is €485,000,000.

a. If Kraftstoff planned to distribute​50% of its net​income, what would be its total net income and total co

Kraftstoff's Income Items


Earnings Before taxes (EBT)
Less Income taxes at 30.0%
Net Income

Distributed Income 50.0%


Less Added Distributed Income Taxes
After-tax Distributed Income

Retained Income 50.0%


Less Added Retained Income Taxes 40% 30% 10.0%
After-tax Retained Income

Total After-tax Net Income

Total Income taxes

b. If Kraftstoff was attempting to choose between a​40% and​60% payout rate to​stockholders, what argum

Kraftstoff's Income Items


Earnings Before taxes (EBT)
Less Income taxes at 30.0%
Net Income

Distributed Income 40.0%


Less Added Distributed Income Taxes
After-tax Distributed Income

Retained Income 40.0%


Less Added Retained Income Taxes 40% 30% 10.0%
After-tax Retained Income

Total After-tax Net Income

Total Income taxes


Kraftstoff's Income Items
Earnings Before taxes (EBT)
Less Income taxes at 30.0%
Net Income

Distributed Income 60.0%


Less Added Distributed Income Taxes
After-tax Distributed Income

Retained Income 60.0%


Less Added Retained Income Taxes 40% 30% 10.0%
After-tax Retained Income

Total After-tax Net Income

Total Income taxes

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 total​after-tax net​income,
hat manufactures electronic​fuel-injection carburetor assemblies for several large automobile companies in​Germany, including​Mercedes
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 tax​bills? (Round to the nearest whole​euro.)

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 to​stockholders, 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 best​interest? ​(Select from the​drop-down menu.)
ult in higher total​after-tax net​income, lower total income taxes for the​firm, and higher dividend income for the stockholders.
ermany, including​Mercedes, BMW, and Opel.
licly in or out of Germany.
uted to stockholders ​(30​%).

lders which of the two payouts is in ​everyone's best​interest?


the stockholders.
Question 4 Gamboa's Tax Averaging.​Gamboa, Incorporated, is a relatively new​U.S.-based retailer of specialty frui
and distribution outlets throughout the southeastern and northeastern regions of the United States.​Ga
Maria​Gamboa, the daughter of the​firm's founder, is being groomed to take over the​firm's financial m
Like many firms of​Gamboa's size, it has not possessed a very high degree of sophistication in financial m
Maria, however, has recently finished her MBA and is now attempting to put some specialized knowled
Her first concern is tax averaging for foreign tax liabilities arising from the two Central American subsidi
which is particularly good since Costa Rica is a relatively​low-tax country. Costa Rican corporate taxes ar
Belize has a higher corporate income tax​rate, 40%, and imposes a​10% withholding tax on all dividends

Assumptions Belize Costa Rica


Earnings before taxes $1,200,000 $1,800,000
Corporate income tax rate 40% 30%
Dividend withholding tax rate 10% 0%

a. If Maria Gamboa assumes a 50​% payout rate from each​subsidiary, calculate the additional taxes due o
(Round to the nearest​dollar.)

Subsidiary Income Statement Belize


Earnings before taxes $1,200,000.00
Less corporate income taxes ($480,000)
Net Income $720,000
Distributed Earnings 50.0% $360,000
Less withholding taxes on dividends ($36,000)
Net dividend remitted to U.S. parent $324,000

U.S. Tax Calculation


Net dividend remitted $324,000
Withholding income taxes $36,000
Proportion of foreign income taxes $240,000
Grossed-up dividend $600,000

Theoretical U.S. tax liability 35.0% $210,000


Foreign tax credits $276,000

Additional U.S. tax due $0


Excess foreign tax credits $66,000

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 the​cross-credits with th

c. What is the minimum effective tax rate that Maria can achieve on her​foreign-sourced income? ​(Select
The minimum effective tax rate Maria can reach on her​foreign-sourced income, assuming something is
ed retailer of specialty fruits and vegetables. The firm is vertically integrated with fruit and​vegetable-sourcing subsidiaries in Central​Ame
ns of the United States.​Gamboa's two Central American subsidiaries are in Belize and Costa Rica.
over the​firm'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 than​Belize,
ta Rican corporate taxes are a flat​30%, 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 on​foreign-sourced income from Belize individually in the following​table:

Costa Rica Combined


$1,800,000
($540,000)
$1,260,000
$630,000
$0
$630,000

$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 the​drop-
te the​cross-credits with the U.S. parent company level and no additional U.S. taxes are due on the remittance and repatriation.

n-sourced income? ​(Select from the​drop-down menu.)


me, assuming something is repatriated from​abroad, is U.S. corporate rate of 35%
bsidiaries in Central​America,

ble than​Belize,
firms with operations there.

ollowing​table:

Corporate Income Tax Rate * Payout Rate

ll? (Select from the​drop-down menu.)


nd repatriation.
Question 5 Chinglish Dirk​(A). Chinglish Dirk Company​(Hong Kong) exports razor blades to its wholly owned paren
The markup was​15% and the sales volume was 2,500 units. Chinglish calculates its profit per container
Corporate management of Torrington Edge is considering repositioning profits within the multinational
What happens to the profits of Chinglish Dirk and Torrington​Edge, and the consolidated results of​both
What is the impact of this repositioning on consolidated​after-tax profit and total tax​payments?

a. Calculate the profits of Chinglish Dirk and Torrington​Edge, and the consolidated results of​both, if the m
(Round to the nearest British​pound.)

Constructing Transfer Chinglish Dirk


(Sales) Price per Unit (British pounds)
Direct Costs 12000
Overhead 4000
Total Costs 16000
Desired Markup 20.0% 3200
Transfer Price (Sales Price) 19200

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 consolidated​after-tax profit and total tax​payments? ​(Selec
By increasing the markup in Hong​Kong, the company has reduced its consolidated income taxes and re
ng) exports razor blades to its wholly owned parent​company, 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 British​pounds):.
ering repositioning profits within the multinational company.
orrington​Edge, and the consolidated results of​both, if the markup at Chinglish was increased to​20% and the markup at Torrington was re
ated​after-tax profit and total tax​payments?

n​Edge, and the consolidated results of​both, if the markup at Chinglish was increased to​20% and the markup at Torrington was reduced t

Constructing Transfer Torrington Edge Consolidated


(Sales) Price per Unit (British pounds) (British pounds)
Direct Costs 19200
Overhead 1000
Total Costs 20200
Desired Markup 10.0% 2020
Transfer Price (Sales Price) 22220

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

ated​after-tax profit and total tax​payments? ​(Select from the​drop-down menus.)


y has reduced its consolidated income taxes and repositioned more of its profits in the lower tax environment in Hong Kong.
rates are 20​% and British tax rates are 31​%.

markup at Torrington was reduced to​10%?

at Torrington was reduced to​10% in the following​table:

nt in Hong Kong.
Question 6 Chinglish Dirk​(B). Chinglish Dirk Company​(Hong Kong) exports razor blades to its wholly owned parent
The markup was​15% 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. It​is, however, fac
Secondly, the British tax authorities - in working with Torrington​Edge's cost accounting staff - has estab
Prove that the optimal combination of markups is a​25.0% markup at Chinglish and an​8.1% markup in T

a. Calculate the profits of Chinglish Dirk and Torrington​Edge, and the consolidated results of​both, if the m
​(Round to the nearest ​cent.)

Constructing Transfer Chinglish Dirk


(Sales) Price per Unit (British pounds)
Direct Costs 10000
Overhead 4000
Total Costs 14000
Desired Markup 25.0% 3500
Transfer Price (Sales Price) 17500

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 consolidated​after-tax profits and total tax​payments?
With the optimal combination of a​25.0% markup in Hong​Kong, resulting in a transfer price of £17,500
The statement above is true. (Select from the​drop-down menu.)
ng) exports razor blades to its wholly owned parent​company, 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 British​pounds):
o reposition profit in Hong Kong. It​is, however, facing two constraints.​First, the final sales price in Great Britain must be​£20,000 or less t
h Torrington​Edge's cost accounting staff - has established a maximum transfer price allowed​(from Hong​Kong) of​£17,800.
25.0% markup at Chinglish and an​8.1% markup in Torrington Edge. What is the impact of this repositioning on consolidated​after-tax profi

n​Edge, and the consolidated results of​both, if the markup at Chinglish was increased to​25.0% and the markup at Torrington was reduced

Constructing Transfer Torrington Edge Consolidated


(Sales) Price per Unit (British pounds) (British pounds)
Direct Costs 17500
Overhead 1000
Total Costs 18500
Desired Markup 8.1% 1499
Transfer Price (Sales Price) 19999

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

ated​after-tax profits and total tax​payments?


Hong​Kong, resulting in a transfer price of £17,500, this allows Torrington Edge to impose an​8.1% markup on its sales and still stay under
down menu.)
rates are 16​% and British tax rates are 32​%.

ain must be​£20,000 or less to remain competitive.​


g) of​£17,800.
n consolidated​after-tax profits and total tax​payments?

up at Torrington was reduced to​8.1% in the following​table:

n its sales and still stay under a sales price of ​£20,000.


Question 1 Nikken Microsystems​(A). Assume Nikken Microsystems has sold Internet servers to Telecom​España fo
The acceptance fee is 1.4% per annum of the face amount of the note. This acceptance will be sold at a
(NOTE: Assume a​360-day year.)

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%

a. The trade acceptance fee is. ​(Round to two decimal​places.)

The discount on the sale of acceptance is. ​(Round to two decimal​places.)

Calculate the net proceeds​below: (Round to two decimal​places.)

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

The annualized percentage​all-in cost​(AIC) is. ​(Round to three decimal​places.)


ernet servers to Telecom​España for €705,000. Payment is due in three months and will be made with a trade acceptance from Telecom ​E
te. This acceptance will be sold at a 3.8% per annum discount. What is the annualized percentage ​all-in-cost in euros of this method of tra

3290.00 Trade Acceptance Fee = Face Amount * Acceptance Fee * (Days/360)

8930.00 Discount On Sale Of Acceptance = Face Amount * Discount Fee * (Days/360)

5.292% Annualized Percentage All-In-Cost (AIC) = (Acceptance Fee + Discount / Amount Received) *
acceptance from Telecom ​España Acceptance.
euros of this method of trade​financing?

ount / Amount Received) * (360 / Days)


Question 2 Nikken Microsystems​(B). Assume Nikken Microsystems has sold Internet servers to Telecom​España fo
The acceptance fee is 1.4% per annum of the face amount of the note. This acceptance will be sold at a
for the trade transaction. It is considering two​alternatives: 1) sell the acceptance for euros at once and
until maturity but at the start sell the expected euro proceeds forward for dollars at the 4​-month forwa

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 at​once: ​(Round to two decimal​places.)

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 alternative​2?

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 the​break-even investment rate that would equalize the net U.S. dollar proceeds from both​alte

d. Which alternative should Nikken Microsystems​choose? (Select all the choices that​apply.)
A. If Nikken​Microsystems' opportunity cost of capital is equal to the​break-even investment​rate, it sh
B. If Nikken​Microsystems' opportunity cost of capital is less than the​break-even investment​rate, it sho
C. Selling the acceptance at​once, alternative​1, improves​Nikken's liquidity and removes the debt that
D. Selling the acceptance in 120 ​days, alternative​2, improves​Nikken's liquidity and removes the debt th
t servers to Telecom​España 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 decimal​places.)

dollar proceeds from both​alternatives?

oices that​apply.)
eak-even investment​rate, it should be indifferent financially between the two alternatives.
ak-even investment​rate, it should be indifferent financially between the two alternatives.
dity and removes the debt that otherwise would be financing the acceptance from Nikken​Microsystem'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

3350.67 Trade Acceptance Fee = Face Amount * Acceptance Fee * (Days/360)

5.825% Break-Even Rate = ((Forward Proceeds/ Spot Proceeds) - 1) * (360 / Days)


Question 3 Motoguzzie​(A). Motoguzzie exports​large-engine motorcycles​(greater than​700cc) to Australia and inv
with payment due in five months. The payment will be made with a​bankers' acceptance issued by Char
If Motoguzzie holds this acceptance to​maturity, what is its annualized percentage​all-in cost? ​(NOTE: A

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%

a. The​bankers' acceptance fee is. ​(Round to the nearest​cent.)

Calculate the amount received by Motoguzzie​below: ​(Round to the nearest​cent.)


Bankers Acceptance
Face amount of bankers acceptance 3,030,000.00
Less acceptance fee for 5-month maturity (22598.75)
Amount receive 3007401.25

The opportunity cost of capital is. ​(Round to the nearest​cent.)

The annualized percentage​all-in cost​(AIC) is. ​(Round to three decimal​places.)


han​700cc) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $ 3,030,000 of merchandise fro
ers' acceptance issued by Charter Bank of Sydney at a fee of 1.79% per annum. Motoguzzie has a weighted average cost of capital of 9.3%
rcentage​all-in cost? ​(NOTE: Assume a​360-day year.)

22598.75 Bankers Acceptance Fee = Face Amount * Acceptance Fee * (Days/360)

116536.80 Opportunity Cost Of Capital = Amount Received * WACC * (Days / 360)

11.103% Annualized Percentage All-In-Cost (AIC) = (Acceptance Fee + Opportunity Cost / A


,030,000 of merchandise from ​Motoguzzie,
erage cost of capital of 9.3%.

e Fee * (Days/360)

ACC * (Days / 360)

ce Fee + Opportunity Cost / Amount Received) * (360 / Days)


Question 4 Motoguzzie​(B). Motoguzzie exports​large-engine motorcycles​(greater than​700cc) to Australia and invo
with payment due in seven months. The payment will be made with a​bankers' acceptance issued by Ch
Bank of America is willing to buy​Motoguzzie's bankers' acceptance for a discount of 5.7% per annum. W
(NOTE: Assume a​360-day year.)

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%

a. The​bankers' acceptance fee is. ​(Round to the nearest​cent.)

The discount on the sale of acceptance is. ​(Round to the nearest​cent.)

Calculate the amount received by Motoguzzie​below: ​(Round to the nearest​cent.)


Bankers Acceptance
Face amount of bankers acceptance 3,090,000.00
Less acceptance fee for 7-month maturity (31003.00)
Less discount on sale of acceptance (102742.50)
Amount receive 2956254.50

The annualized percentage​all-in cost​(AIC) is. ​(Round to three decimal​places.)


han​700cc) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $3,090,000 of merchandise from
nkers' acceptance issued by Charter Bank of Sydney at a fee of 1.72% per annum. Motoguzzie has a weighted average cost of capital of 9.3
discount of 5.7% per annum. What would be​Motoguzzie's annualized percentage​all-in cost of financing its $3,090,000 Australian​receiva

31003.00 Bankers Acceptance Fee = Face Amount * Acceptance Fee * (Days/360)

102742.50 Discount On Sale Of Acceptance = Face Amount * Discount Fee * (Days/360)

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 Australian​receivable?

(Days/360)

count / Amount Received) * (360 / Days)


Question 5 Nakatomi Toyota. Nakatomi Toyota buys its cars from Toyota Motors​(U.S.), and sells them to U.S. customers.
Final payment is due to Nakatomi Toyota in six months. EcoHire has bought $208,000 worth of cars from​Naka
Nakatomi Toyota will have the EcoHire receivable accepted by Alliance Acceptance for a 2.1% ​fee, and then se

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%

The amount financed is. ​(Round to the nearest​cent.)

The trade acceptance fee is. ​(Round to the nearest​cent.)

The discount for the period is. ​(Round to the nearest​cent.)

Calculate the proceeds to Nakatomi Toyota​below: (Round to the nearest​cent.)

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

a. What is the annualized percentage​all-in cost to Nakatomi​Toyota? ​(Round to three decimal​places.)

b. What are​Nakatomi's net cash​proceeds, including the cash down​payment? (Round to three decimal​places.)
S.), and sells them to U.S. customers. One of its customers is​EcoHire, a car rental firm that buys cars from Nakatomi Toyota at a wholesale
ht $208,000 worth of cars from​Nakatomi, 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.

166,400.00 Amount Financed = Face Amount Of sale - Down Payment

1,747.20 Trade Acceptance Fee = Amount Financed * Acceptance Fee * (Days/3

2,912.00 Discount On Sale Of Acceptance = Amount Financed * Discount Fee *

d to three decimal​places.) 5.761% Annualized Percentage All-In-Cost (AIC) = (Acceptance Fee + Discount

nt? (Round to three decimal​places.) 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

* Acceptance Fee * (Days/360)

t Financed * Discount Fee * (Days/360)

(Acceptance Fee + Discount / Amount Received) * (360 / Days)

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 City​Bank, for a 1.2% fee and delivered to Gunslinger Drilling. At this​point, Gunslinger Drilling will
Bank of​Zurich, receiving the full $256,000 principal amount. Bank of Zurich will sell the notes by redisco
At​maturity, 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 percentage​all-in cost to Umaru Oil of financing the first $256,000 note due Mar
Calculate total interest and fees​below: (Round to the nearest​dollar.)

Total Interest and Fees


Face amount of note: 256,000
Less Lagos City Bank endorsement fee (1.2%)
Less Bank of Zurich commitment fee for one year (1.9%)
Less discount on note at LIBOR plus spread (8.2%)
Total interest and fees

The annualized percentage​all-in cost​(AIC) is. (Round to three decimal​places.)

b. What might motivate Umaru Oil to use this relatively expensive alternative for​financing? ​(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 Unicorn​Drilling, the exporter.
280,000 of oil drilling equipment from Gunslinger Drilling of​Houston, Texas.
$ 256,000 per year due on March 1 of each year. Bank of ​Zurich, a Swiss​forfaiter,
ount rate would be approximately 8.2% per annum based on the expected ​3-year LIBOR rate plus 200 basis​points,
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,
s​point, Gunslinger Drilling will endorse the notes without recourse and discount them with the​forfaiter,
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%

e first $256,000 note due March​1, one year from​today?

(3072.00)
(4864.00)
(20992.00)
28928.00

11.300% Annualized Percentage All-In-Cost (AIC) = (Total Interest and Fees / Face Amount Of Note)

e for​financing? ​(Select from the​drop-down menus.)


dit rating is too low to qualify for more normal financing. Note that the 11.3%
nicorn​Drilling, the exporter.
actual discounted notes
endorsed by their ​bank,

m Bank of Zurich.

es / Face Amount Of Note)


Question 7 Swishing Shoe Company​(B). Swishing Shoe Company of​Durham, North​Carolina, has received an order for 51
The shoes will be shipped to Southampton Footware under the terms of a letter of credit issued by a London b
will be paid 120 days after the London bank accepts a draft drawn by Southampton Footware in accordance wi
and Southampton Footware estimates its weighted average cost of capital to be 17.2% per annum. The comm

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 to​maturity, as compared to discounting the​ba
Alternative​1: If Southampton Footware holds the draft for 90 days after the bank has accepted​it, Swishing Fo
The present value of £397,000 received 120 days​hence, discounted at​Swishing's WACC is. ​(Round to two dec

Alternative​2: Swishing Shoes can sell the​bankers' acceptance in​today's London money market at​a(n) 12.3%
The discount on the sale of acceptance is. ​(Round to two decimal​places.)

Calculate the amount received now​below: (Round to two decimal​places.)


Alternative 2
Face value of the shippment 397,000
Less commission (2.1%) ($8,337)
Bankers acceptance discount for period, (120 days) ($16,277)
Amount received now 372386.00

The difference between alternatives is. ​(Round to two decimal​places.)

(Select all the choices that​apply.)


A. ​Swishing's gain should be calculated in present value terms. Swishing will receive £372,386.00 today by di
The present value of the £397,000 to be received in 120 ​days, discounted at​Swishing's WACC of 17.2%​, is £3
B. The difference is £3,086.89.
C. Swishing would​gain, in terms of present value​cash, £3,086.89 by discounting the​bankers' acceptance and t
D. Swishing would​gain, in terms of present value​cash, £3,086.89 by waiting 120 days to receive the face am

b. Does Swishing Shoe Company incur any other risks in this​transaction? ​(Select all the choices that​apply.)
A. In this transaction Swishing has assumed the foreign exchange transaction​risk; that​is, 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 transaction​risk; that​is, 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 the​bankers' acceptance at the time of​sale, 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 the​bankers' acceptance at the time of​sale, 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 that​apply.)
A. If Swishing shifts manufacturing to Ireland from North​Carolina, 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 the​banker's acceptance in​today
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 consider​except: (Select the best choice​below.)

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 in​Ireland, the following factors must be​considered:
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 in​Ireland, versus North​Carolina; and the availability and level of education of
5. The​existence, or​nonexistence, of excess capacity in the North Carolina​factory, both at present and in term
6. The political risk of investing in Ireland for the British​market, should the type of political terrorism and​anti-
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 Southampton​Footware, Ltd., of​England, 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 a​bankrs' acceptance in the discount market is 2.1% of the face amount.

Values
397,000
120
17.200%
12.300%
2.100%

pared to discounting the​bankers' acceptance at​once?


as accepted​it, Swishing Footware will received the face amount of £397, 000. 375472.89 Present Value = Face Va
ACC is. ​(Round to two decimal​places.)

oney market at​a(n) 12.3% per annum discount. 16277.00 Discount On Sale = Face

3086.89 Difference = Present Va

e £372,386.00 today by discounting the​bankers' acceptance.


ng's WACC of 17.2%​, is £375,472.89.

​bankers' acceptance and taking the cash at once.


ays to receive the face amount of the acceptance.

e choices that​apply.)
hat​is, the risk that the pounds sterling to be received from the export will be worth more dollars when received.
nds sterling for dollars.
that​is, 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 buy​more, rather than​less,

ars at once at the exchange rate then in effect. If Swishing waits 120 days to receive the pounds​sterling,
he time of sale and the time of collection.​(Of course, Swishing might gain if the pound would buy​more, rather than​less,

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 such​banker'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 in​today's London money market is unique to that moment in time.
n be preferable.

North Carolina versus manufacturing them in ​Ireland?

s must be​considered:

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 and​anti-British feelings currently in Northern Ireland spread to the Republic of Ireland itself.
This might seem unlikely in the Irish British​context, but for other countries it could be a significant​factor.)

into a decision to invest rather than​export, 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% per​annum,

Present Value = Face Value Of Invoice / (1 + WACC * (Days/360))

Discount On Sale = Face Amount Of Shipment * Discount Rate * (Days / 360)

Difference = Present Value - Amount Received Now


nto Britain free of any import duty.

tegy of a firm.
Question 8 Swishing Shoe Company​(B). Swishing Shoe Company of​Durham, North​Carolina, 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 to​maturity, as compared to discounting th
Alternative​1: If Southampton Footware holds the draft for 120 days after the bank has accepted​it, Swishi
The present value of £400,000 received 120 days​hence, discounted at​Swishing's WACC is. ​(Round to two

Alternative​2: Swishing Shoes can sell the​bankers' acceptance in​today's London money market at​a(n) 12
The discount on the sale of acceptance is. ​(Round to two decimal​places.)

Calculate the amount received now​below: (Round to two decimal​places.)


Alternative 2
Face value of the shippment 400,000
Less commission (2.1%) ($8,000)
Bankers acceptance discount for period, (120 days) ($16,000)
Amount received now 376000.00

The difference between alternatives is. ​(Round to two decimal​places.)

(Select all the choices that​apply.)


A. ​Swishing's gain should be calculated in present value terms. Swishing will receive £376,000.00 today b
The present value of the £400,000 to be received in 120 ​days, discounted at​Swishing's WACC of 18%​, is £
B. The difference is £1,358.49.
C. Swishing would​gain, in terms of present value​cash, £1,358.49 by waiting 120 days to receive the face
D. Swishing would​gain, in terms of present value​cash, £1,358.49 by discounting the​bankers' acceptance

b. Does Swishing Shoe Company incur any other risks in this​transaction? ​(Select all the choices that​apply.)
A. In this transaction Swishing has assumed the foreign exchange transaction​risk; that​is, 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 transaction​risk; that​is, 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 the​bankers' acceptance at the time of​sale, 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 the​bankers' acceptance at the time of​sale, 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 that​apply.)
A. If Swishing shifts manufacturing to Ireland from North​Carolina, 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 the​banker'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 consider​except: (Select the best choice​below.)

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 in​Ireland, the following factors must be​considered:
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 in​Ireland, versus North​Carolina; and the availability and level of educatio
5. The​existence, or​nonexistence, of excess capacity in the North Carolina​factory, both at present and in t
6. The political risk of investing in Ireland for the British​market, should the type of political terrorism and​a
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 Southampton​Footware, Ltd., of​England, 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 a​bankers' acceptance in the discount market is 2% of the face amount.

Values
400,000
120
18.000%
12.000%
2.000%

ty, as compared to discounting the​bankers' acceptance at​once?


r the bank has accepted​it, Swishing Footware will received the face amount of £400,000. 377358.49
wishing's WACC is. ​(Round to two decimal​places.)

London money market at​a(n) 12% per annum discount. 16000.00

1358.49

will receive £376,000.00 today by discounting the​bankers' acceptance.


d at​Swishing's WACC of 18%​, is £377,358.49.

iting 120 days to receive the face amount of the acceptance.


ounting the​bankers' acceptance and taking the cash at once

elect all the choices that​apply.)


tion​risk; that​is, the risk that the pounds sterling to be received from the export will be worth more dollars when received.
ge the pounds sterling for dollars.
ction​risk; that​is, the risk that the pounds sterling to be received from the export will be worth fewer dollars when received.
nge the pounds sterling for dollars.
eives dollars at once at the exchange rate then in effect. If Swishing waits 120 days to receive the pounds ​sterling,
een the time of sale and the time of collection. ​(Of course, Swishing might gain if the pound would buy​more, rather than​less,

eceives dollars at once at the exchange rate then in effect. If Swishing waits 120 days to receive the pounds​sterling,
between the time of sale and the time of collection.​(Of course, Swishing might gain if the pound would buy​more, rather than​less,

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 such​banker's acceptances as it now might be incurring.
undertaking the associated translation risk.
to sell the​banker's acceptance in​today'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.

hoes from North Carolina versus manufacturing them in ​Ireland?

wing factors must be​considered:

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.
a​factory, both at present and in terms of expected future growth.
e type of political terrorism and​anti-British feelings currently in Northern Ireland spread to the Republic of Ireland itself.
be stolen.​(This might seem unlikely in the Irish British​context, but for other countries it could be a significant​factor.)

at might go into a decision to invest rather than​export, 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% per​annum,
ce amount.

Present Value = Face Value Of Invoice / (1 + WACC * (Days/360))

Discount On Sale = Face Amount Of Shipment * Discount Rate * (Days / 360)

Difference = Present Value - Amount Received Now

n received.

when received.

ather than​less,
more, rather than​less,

mport them into Britain free of any import duty.

e global strategy of a firm.


Question 1 Carambola de Honduras. Slinger​Wayne, a​U.S.-based private equity​firm, is trying to determine what it
Slinger Wayne estimates that Carambola will generate a free cash flow of 10 million Honduran lempiras
A private equity firm like Slinger​Wayne, however, is not interested in owning a company for​long, and p
The current spot exchange rate is Lp14.0651​/$, but the Honduran inflation rate is expected to remain at
Slinger Wayne expects to earn at least a 20.5 % annual rate of return on international investments like C

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%
Slinger​Wayne expected annual rate of return 20.5%

a. Calculate the free cash flows in Honduran lempiras​(Lp) below: ​(Round to the nearest whole​number.)
Assume that the Honduran lempira were to remain fixed over the​three-year investment period. Calcula
Year 0
Carambola expected free cash flow
Expected sale value in year 3
Total expected cash flow

Expected exchange rate (Lp/$) 14.0651

Carambola expected cash flow in US$

If Slinger Wayne expects to earn at least a 20.5 % annual rate of return on international​investments, 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

Expected exchange rate (Lp/$) 14.0651

Carambola expected cash flow in US$

If Slinger Wayne expects to earn at least a 20.5 % annual rate of return on international​investments, th
Method 2
rying to determine what it should pay for a tool manufacturing firm in Honduras named Carambola.
million Honduran lempiras​(Lp) next​year, and that this free cash flow will continue to grow at a constant rate of 8.5 % per annum indefinit
a company for​long, and plans to sell Carambola at the end of three years for approximately 10 times​Carambola'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 whole​number.)
investment period. Calculate the free cash flows in U.S. dollars​below: (Round to the nearest​dollar.)
Year 1 Year 2 Year 3
10,000,000 10850000 11772250 Expected Free Cash Flow In Year​2 (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

14.0651 14.0651 14.0651

710980 771413 9206813 Expected Free Cash Flow In Year​1 (FCF1$ ) = FCF 1LP / S1SL/$

ernational​investments, the value of Carambola today is. (Round to the nearest​dollar.) 6383260
$6,383,260

ing to purchasing power parity. Calculate the spot exchange rates for the next three years ​below: ​(Round to four decimal​places.)
Year 1 Year 2 Year 3
10,000,000

10,000,000 10,850,000 129,494,750

15.1983 16.4228 17.7460 Expected Exchange Rate Year 2 = Expected Exchange Rate Year 1

657968 660666 7297131 Expected Free Cash Flow In Year​1 (FCF1$ ) = FCF 1LP / S1SL/$

ernational​investments, the value of Carambola today is. ​(Round to the nearest​dollar.) 5171556
$5,171,556
of 8.5 % per annum indefinitely.
ola's free cash flow in that year.
of only 5.5​% per annum.

CF2LP ) = FCF 1LP * (1 + g)1


cted Free Cash Flow In Year 3 * Assumed Sale Multiple Of FCF In Year 3
free cash flow + Expected sale value in year 3

CF1$ ) = FCF 1LP / S1SL/$

PV0$ = FCF1$ / (1 + r)^1 + FCF2$ / (1 + r)^2 + FCF3$ / (1 + r)^3


PV0$ = -Initial Investment + NPV = (Rate, Values)

our decimal​places.)

ected Exchange Rate Year 1 * (1 + Honduran Inflation Rate / 1 + U.S. Inflation Rate)

CF1$ ) = FCF 1LP / S1SL/$

PV0$ = FCF1$ / (1 + r)^1 + FCF2$ / (1 + r)^2 + FCF3$ / (1 + r)^3


PV0$ = -Initial Investment + NPV = (Rate, Values)
Question 2 Finisterra, S.A. ​Finisterra, S.A., located in the state of Baja​California, Mexico, manufactures frozen Mexican fo
In order to be closer to its U.S.​market, Finisterra is considering moving some of its manufacturing operations t
The operations in California will pay 77​% of its accounting profit to Finisterra as an annual cash dividend. Mexi
The corporate income tax rate in U.S. is 38​% ​(the tax rate in Mexico is lower than the rate in the​U.S.), the curr
respectively. Assume the​after-tax dividends received by the parent in years 4 through infinity will be the same

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 1​below: ​(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

Cost per unit ($) ($3.91) ($4.08)


Total costs ($4,301,000) ($4,925,565)
Gross profit $1,331,000 $1,468,624

Less general and administrative expenses ($110,000) ($110,000)


Less depreciation expenses ($72,000) ($72,000)

Operating profit before taxes $1,149,000 $1,286,624


Less U.S. corporate income taxes (38%) ($436,620) ($488,917)
Net income $712,380 $797,707

Dividends distributed ($) (77% of net income) $548,533 $614,234


Exchange rate (Ps/$) 11 12
Dividends remitted to parent (Pesos) 6033859 7370814
Additional taxes due in Mexico 0 0
Dividends received, after-tax (Pesos) 6033859 7370814

Terminal value ($) (discounted at 20.20%)


(dividend in year 4 / 20.20%)
Terminal value (Pesos)

Total cash flow for discounting (Pesos) 6033859 7370814

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 nearest​dollar.)
, 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 for​host-c
is lower than the rate in the​U.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 nearest​cent.)
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)

$685,881 Dividends distributed ($) = Net income * Percentage Of Dividends distributed


13
8916459 Dividends remitted to parent (Pesos) = Dividends distributed ($) / Exchange rate (Ps/$)
0
8916459 Dividends received, after-tax (Pesos) = Dividends remitted to parent (Pesos) + Additional 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 whole​number.) 44772919 PV0$ = CF1$ / (1 + WACC)^1 + CF2$ / (1 + WACC)^2 + CF3$ / (1 +
$44,772,919 PV0$ = -Initial Investment + NPV = (Rate, Values)

ment iS. ​(Round to the nearest​dollar.) $4,477,292 PV0$ = PV0PS/ S0PS/$


Arizona to the north.
for three years and have the following ​attributes:
ries, with a credit for​host-country taxes already paid.
next three years will be Ps11.00​/$, Ps12.00​/$, and Ps13.00​/$,
ar price Finisterra should offer today for the ​investment?

ected Sales Price Growth)


Volume Growth)

ministrative expenses + Less depreciation expenses)


xes - (1 * U.S. Corporate Income Taxes)
Exchange rate (Ps/$)

nt (Pesos) + Additional taxes due in Mexico

lue Discount Rate

$
/ (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 first​dividend, to be paid in one​year, 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

Current and expected spot rate ($/€) 1.3401 1.3924

Dividend ($) $1,099,967

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

Current and expected spot rate ($/€) 1.3401 1.2972

Dividend ($) $1,024,801

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 years​below: 
to four decimal places for the exchange​rates.)
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 nearest​dollar.) 3109715
$3,109,715

gainst the dollar. Calculate the dividends in U.S. dollars for the next three years​below:  ​
to four decimal places for the exchange​rates.)
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 nearest​dollar.) 2699215
$2,699,215
Dividend Expected Growth Rate)

hange Rate Year 1 * (1 + Expected Appreciation)

nvement (€) * Current and expected spot rate ($/€)

PV0$ = Div1 / (1 + WACC)^1 +Div2 / (1 + WACC)^2 + Div3 / (1 + WACC)^3


PV0$ = -Initial Investment + NPV = (Rate, Values)

Dividend Expected Growth Rate)

hange Rate Year 1 * (1 - Expected Depreciation)

nvement (€) * Current and expected spot rate ($/€)

PV0$ = Div1 / (1 + WACC)^1 +Div2 / (1 + WACC)^2 + Div3 / (1 + WACC)^3


PV0$ = -Initial Investment + NPV = (Rate, Values)
Question 4 Natural Mosaic. Natural Mosaic Company​(U.S.) is considering investing Rs58,000,000 in India to create
After five​years, the subsidiary would be sold to Indian investors for Rs116,000,000. A pro forma income
is listed in the popup​table, The initial investment will be made on December​31, 2011, and cash flows w
Annual cash dividends to Natural Mosaic from India will equal 90​% of accounting income. The U.S. corpo
Because the Indian tax rate is greater than the U.S. tax​rate, annual dividends paid to Natural Mosaic wi
There are no capital gains taxes on the final sale. Natural Mosaic uses a weighted average cost of capita
for the Indian investment because of perceived greater risk. Natural Mosaic forecasts for the​rupee/doll

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 2013​below: ​(Round to the nearest wh
Calculate the cash flows in Indian rupees for years 2014 through 2016​below: ​(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 the​project's viewpoint is. ​(Round to the nearest whole​n
Method 2

The internal rate of return on this investment from the​project's viewpoint is. (Round to two decimal​pl
Answer Check

b. Calculate the cash flows in U.S. dollars for years 2011 through 2013​below: (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

Net cash flow to parent After-tax ($) (1,208,333) 123,529

The net present value on this investment from the​parent's viewpoint is. ​(Round to the nearest​dollar.)
Method 2

The internal rate of return on this investment from the​parent's viewpoint is. (Round to two decimal​pla
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,
December​31, 2011, and cash flows will occur on December 31st of each succeeding year.
of accounting income. The U.S. corporate tax rate is​40% 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 domestic​investments, but will add six percentage points
al Mosaic forecasts for the​rupee/dollar exchange rate on December 31st for the next six years are listed in the popup​table.

Assumptions Values Assumptions


Investment 58,000,000 2011 48
Period 5 2012 51
Sold 116,000,000 2013 54
Dividends to Natural Mosaic from India 90%
U.S. Corporate Tax rate 40%
Indian Corporate Tax rate 50%
Natural Mosaic WACC 16%
Additional Percentage Point 6%

013​below: ​(Round to the nearest whole​number.)


016​below: ​(Round to the nearest whole​number.)
2013 2014 2015 2016
11,000,000 11,000,000 11,000,000 11,000,000

116,000,000
11,000,000 11,000,000 11,000,000 127,000,000

oint is. ​(Round to the nearest whole​number.) 16419951 NPV = CF0 + CF1/(1 + K) + CF2/(
16419951 NPV = Initial Investment + NPV

ewpoint is. (Round to two decimal​places.) 30.02% IRR = IRR (Cash Flow in Rs)
0% 0 = CF0 + CF1/(1 + K) + CF2/(1

3​below: (Round to the nearest whole​number.)


2013 2014 2015 2016
7,000,000 7,000,000 7,000,000 7,000,000

6300000 6300000 6300000 6300000 Dividend received in the U.S (


116,000,000
6300000 6,300,000 6300000 122300000
54 57 60 63
Net cash flow to parent After-
116,667 110,526 105,000 1,941,270 Net cash flow to parent After-

oint is. ​(Round to the nearest​dollar.) -202163 NPV = CF0 + CF1/(1 + K) + CF2/(
-202163 NPV = Initial Investment + NPV

ewpoint is. (Round to two decimal​places.) 16.84% IRR = IRR (Cash Flow in Rs)
0% 0 = CF0 + CF1/(1 + K) + CF2/(1 +
00,000 of annual cash ​flow,

the popup​table.

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)

IRR = IRR (Cash Flow in Rs)


0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5

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)

IRR = IRR (Cash Flow in Rs)


0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
cted exchange rate (Rs/$)
Question 5 Doohicky Devices. Doohickey​Devices, Inc., manufactures design components for personal computers. U
but for reasons of quality control Doohicky has decided to manufacture the components itself in Asia. A
At the moment only the summary of​expected, after-tax, cash flows displayed in the popup​table, is ava
some additional U.S. dollar cash outflows would be​necessary, as shown in the above popup table. The M
Doohicky expects the Malaysian ringgit to appreciate 2.1% per year against the​dollar, and the Philippin
If the weighted average cost of capital for Doohicky Devices is 15.0​%, which project looks more​promisin

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 in​Penang, Malysia for years 2012 through 2014​
Doohicky in Penang (After-tax) 2012
Net cash flows (ringgit) -28,000

Expected exchange rate (Ringgit/$) 3.6482

Cash flows ($) (7675.02)


Cash outflows ($) $0
Net total cash flows ($) ($7,675.02)

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 in​Manila, Philippines for years 2012 through 20
(Round the exchange rate to two decimal places and the dollar amount to the nearest​cent.)
Doohicky in Penang (After-tax) 2012
Net cash flows (ringgit) -550,000

Expected exchange rate (Pesos/$) 50.65

Cash flows ($) (10858.84)


Cash outflows ($) $0
Net total cash flows ($) ($10,858.84)

If the weighted average cost of capital for Doohicky Devices is 15.0​%, the NPV of the operations in Mani
Method 2

Which project looks more​promising? (Select the best response​below.)


A. Doohickey Penang looks more promising.
B. Neither project looks very promising.
C. Both projects look very promising.
D. Doohickey Manila looks more promising.
n components for personal computers. Until the​present, manufacturing has been subcontracted to other​companies,
facture the components itself in Asia. Analysis has narrowed the choice to two ​possibilities, Penang,​Malaysia, and​Manila, the Philippines
ows displayed in the popup​table, is available. Although most operating outflows would be in Malaysian ringgit or Philippine​pesos,
s shown in the above popup table. The Malaysia ringgit currently trades at RM3.6482​/$ and the Philippine peso trades at Ps50.65​/$.
ear against the​dollar, and the Philippine peso to depreciate 4.9​% per year against the dollar.
5.0​%, which project looks more​promising?

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 2014​below: ​(Round the exchange rate to four decimal places and the dollar amount to the nearest​ce
2013 2014 2015 2016 2017
8,200 6,600 7,200 9,000 10,000

3.5732 3.4997 3.4277 3.3572 3.2881 Expected exchange rate (ring

2294.89 1885.89 2100.54 2680.81 3041.24


($100) ($130) ($150) ($150) $0
$2,194.89 $1,755.89 $1,950.54 $2,530.81 $3,041.24

5.0​%, the NPV of the operations in Penang is. ​(Round to the nearest​cent.) -197 NPV = CF0 + CF1/(1 + K) + CF2/
-197 NPV = Initial Investment + NPV

a, Philippines for years 2012 through 2014​below:  ​


amount to the nearest​cent.)
2013 2014 2015 2016 2017
190,000 160,000 200,000 200,000 220,000

53.2597 56.0039 58.8895 61.9238 65.1144

3567.42 2856.94 3396.19 3229.78 3378.67


($100) ($200) ($300) ($400) $0
$3,467.42 $2,656.94 $3,096.19 $2,829.78 $3,378.67

5.0​%, the NPV of the operations in Manila is. ​(Round to the nearest​cent.) -501 NPV = CF0 + CF1/(1 + K) + CF2/
-501 NPV = Initial Investment + NPV
sia, and​Manila, the Philippines.
ggit or Philippine​pesos,
peso trades at Ps50.65​/$.

Values
3.6482
50.65
2.1%
4.9%
15.0%

ollar amount to the nearest​cent.)

Expected exchange rate (ringgit/$) = [spot / (1 + Malaysia Ringgit Appreciation)

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 Hermosa​Components: Baseline Analysis. Hermosa Beach​Components, Inc., of California exports 26,000 sets of​
In​Argentina, the bulbs are sold for the Argentine peso equivalent of ​$60 per set. Direct manufacturing costs in th
neither growing nor​shrinking, and Hermosa holds the major portion of the market. The Argentine government ha
If Hermosa makes the​investment, 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 local​debt.) 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 as​follows: All investment outlays
Depreciation and Investment Recovery. Building and equipment will be depreciated over five years on a​straight
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 as​follows:
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 and​state
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 the​project). Create a project

Assumptions Values Assumptions


Total exports 26,000 Building and equipment
Investment life 5 Net working capital
Argentina selling price (U.S. dollar equivalent) 60 Total investment
Direct manufacturing cost in U.S. 40
Transfer price per set (Raw material) 10 Assumptions
Direct costs & indirect cost 5 Materials purchased in Argentina
Pre-tax profit to Hermosa Beach 5 Materials imported from Hermos
Corporate income tax rate 42% Total variable costs
Discount rate 12%

Calculate the free cash flows in years 2012 through 2014 from the​project's viewpoint​below: (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 the​project's viewpoint is. ​(Round to the nearest​dollar.)
Method 2

The internal rate of return on this investment from the​project's viewpoint is. (Round to two decimal​places.)
Answer Check

Calculate the free cash flows in years 2012 through 2014 from the​parent's viewpoint​below: ​(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

b) Cash flow from Argentina to Hermosa 536400

Cash flow loss on Hermosa's loss of exports (520000)


Less U.S. taxes on export losses 218400
c) Net cash flow reduction after-tax (301600)

d) Recapture of NWC in Argentina (no tax)


Total parent cash flow, after-tax (a+b+c+d) 310200
Initial investment ($2,100,000)
Free cash flow to parent for discounting ($2,100,000) 310200

The net present value on this investment from the​parent's viewpoint is. ​(Round to the nearest​dollar.)
Method 2

The internal rate of return on this investment from the​parent's viewpoint is. (Round to two decimal​places.)
Answer Check

The project should be rejected because the prospective investment from the​parent's viewpoint has a negative N
ornia exports 26,000 sets of​low-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. ​
al​debt.) 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 in​2012, and all operating cash flows will occur at the end of years 2013 through 2017.
over five years on a​straight-line basis. At the end of the fifth​year, the ​$1,100,000 of net working capital may also be repatriated to the U

equivalent of ​$60 per set.

nsists of ​$5 of direct and indirect costs incurred in the United States on their​manufacture, creating​$5 of​pre-tax profit to Hermosa Beach
​(combined federal and​state/province). There are no capital gains taxes on the future sale of the Argentine​subsidiary, either in Argentina
mestic and foreign projects.

mosa's management wishes the baseline analysis to be performed in U.S. dollars​


he​project). Create a project viewpoint capital budget and a parent viewpoint capital budget. What do you conclude from your ​analysis?

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

nt​below: (Round to the nearest​dollar.)


2014 2015 2016 2017
26,000 26,000 26,000 26,000
60 60 60 60
1560000 1560000 1560000 1560000
(520000) (520000) (520000) (520000)
(260000) (260000) (260000) (260000)
$780,000 $780,000 $780,000 $780,000
(200000) (200000) (200000) (200000)
580000 580000 580000 580000
(243600) (243600) (243600) (243600)
336400 336400 336400 336400
200000 200000 200000 200000
536400 536400 536400 536400
1100000

536400 536400 536400 1636400

the nearest​dollar.) 457771 NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1


457771 NPV = Initial Investment + NPV = (Rate, Values)

d to two decimal​places.) IRR = IRR (Cash Flow in Rs)


168200000% 0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 +

t​below: ​(Round to the nearest​dollar.)


2014 2015 2016 2017
260,000 260,000 260,000 260,000
(130000) (130000) (130000) (130000)
130000 130000 130000 130000
(54600) (54600) (54600) (54600)
75400 75400 75400 75400

536400 536400 536400 536400

(520000) (520000) (520000) (520000)


218400 218400 218400 218400
(301600) (301600) (301600) (301600)

1100000
310200 310200 310200 1410200

310200 310200 310200 1410200

he nearest​dollar.) -357629 NPV = CF0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1


-357629 NPV = Initial Investment + NPV = (Rate, Values)

to two decimal​places.) 6.39% IRR = IRR (Cash Flow in Rs)


0% 0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 +

s viewpoint has a negative NPV. (Select from the​drop-down menus.)


n five years.
type of bulb in Argentina is​stable,
ed by local production.
net working capital. ​

13 through 2017.
lso be repatriated to the United​States,

ax profit to Hermosa Beach.


bsidiary, either in Argentina or the United States.

clude from your ​analysis?


K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
ent + NPV = (Rate, Values)

+ CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5

K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5


ent + NPV = (Rate, Values)

+ CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5


Question 7 Hermosa​Components: Revenue Growth and Sales Price Scenario. Hermosa Beach​Components, Inc., of Californ
In​Argentina, the bulbs are sold for the Argentine peso equivalent of ​$60.00 per set. Direct manufacturing costs i
The market for this type of bulb in Argentina is​stable, neither growing nor​shrinking, and Hermosa holds the ma
The Argentine government has invited Hermosa to open a manufacturing plant so imported bulbs can be replace
If Hermosa makes the​investment, 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 local​debt.) 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 as​follows:


All investment outlays will be made in​2012, and all operating cash flows will occur at the end of years 2013 thro
Depreciation and Investment Recovery. Building and equipment will be depreciated over five years on a​straight
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 ​$60.00 per set.
Operating Expenses per Set of Bulbs. Material purchases are as​follows:
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 38​% in both Argentina and the United States​(combined federal and​stat
Discount Rate. Hermosa Components uses a discount rate of 14​% to evaluate all domestic and foreign projects.

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 to​rise, U.S.-based costs are not expected to change over the​
In addition to the assumptions employed​above, 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

Assumptions Values Growth


Total exports 25,000 3%
Investment life 5
Argentina selling price (U.S. dollar equivalent) 60 6%
Direct manufacturing cost in U.S. 40
Transfer price per set (Raw material) 10 5%
Direct costs & indirect cost 5
Pre-tax profit to Hermosa Beach 5
Corporate income tax rate 38%
Discount rate 14%
Argentine inflation Rate 4%

Calculate the free cash flows in years 2012 through 2014 from the​project's viewpoint​below: ​(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 the​project's viewpoint is. ​(Round to the nearest​dollar.)
Method 2

The internal rate of return on this investment from the​project's viewpoint is. (Round to two decimal​places.)
Answer Check

Calculate the free cash flows in years 2012 through 2014 from the​parent's viewpoint​below: ​(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

b) Cash flow from Argentina to Hermosa 541000

Cash flow loss on Hermosa's loss of exports (500000)


Less U.S. taxes on export losses 190000
c) Net cash flow reduction after-tax (310000)

d) Recapture of NWC in Argentina (no tax)


Total parent cash flow, after-tax (a+b+c+d) 308500
Initial investment ($2,200,000)
Free cash flow to parent for discounting ($2,200,000) 308500

The net present value on this investment from the​parent's viewpoint is. ​(Round to the nearest​dollar.)
Method 2

The internal rate of return on this investment from the​parent's viewpoint is. (Round to two decimal​places.)
Answer Check
The project should be accepted because the prospective investment from the​parent's viewpoint has a positive N
Components, Inc., of California exports 25,000 sets of​low-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. ​
al​debt.) Hermosa will be allowed to repatriate all net income and depreciation funds to the United States each year.

t the end of years 2013 through 2017.


over five years on a​straight-line basis. At the end of the fifth​year, the ​$1,200,000 of net working capital may also be repatriated to the U

equivalent of ​$60.00 per set.

nsists of ​$5 of direct and indirect costs incurred in the United States on their​manufacture, creating​$5 of​pre-tax profit to Hermosa Beach
​(combined federal and​state/province). There are no capital gains taxes on the future sale of the Argentine​subsidiary, either in Argentina
mestic and foreign projects.

% per year. Argentine inflation is expected to average 4​% per​year, so sales price and material cost increases of 6​% and 5​% per​year, respe
xpected to change over the​five-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

Return of net working capital 2995710

nt​below: ​(Round to the nearest​dollar.)


2014 2015 2016 2017
25,750 26,523 27,318 28,138 Annual unit sold (sets) = Unit Sold *
63.60 67.42 71.47 75.76 Sales price in Argentina per set = Sa
1637700 1788147 1952430 2131714
(540750) (584821) (632484) (684031) Direct Manufacturing and Shipping
(257500) (265225) (273182) (281377)
$839,450 $938,101 $1,046,764 $1,166,305
(200000) (200000) (200000) (200000)
639450 738101 846764 966305
(242991) (280478) (321770) (367196)
396459 457623 524994 599109
200000 200000 200000 200000
596459 657623 724994 799109
2995710

596459 657623 724994 3794819

the nearest​dollar.) 1577558 NPV = CF0 + CF1/(1 + K) + CF2/(1 + K


1577558 NPV = Initial Investment + NPV = (Ra

d to two decimal​places.) 32.42% IRR = IRR (Cash Flow in Rs)


0% 0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2

t​below: ​(Round to the nearest​dollar.)


2014 2015 2016 2017
257,500 265,225 273,182 281,377 Sales Revenue On Exports To Argen
(128750) (132613) (136591) (140689) Direct And Indirect Costs On Export
128750 132613 136591 140689
(48925) (50393) (51905) (53462)
79825 82220 84686 87227

596459 657623 724994 799109 Cash flow from Argentina to Hermo

(515000) (530450) (546364) (562754) Cash flow loss on Hermosa's loss of


195700 201571 207618 213847 Less U.S. taxes on export losses = A
(319300) (328879) (338745) (348908)

2995710
356984 410963 470935 3533138

356984 410963 470935 3533138

he nearest​dollar.) 736523 NPV = CF0 + CF1/(1 + K) + CF2/(1 + K


736523 NPV = Initial Investment + NPV = (Ra

to two decimal​places.) 22.55% IRR = IRR (Cash Flow in Rs)


0% 0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2
t's viewpoint has a positive NPV. ​(Select from the​drop-down menus.)
ort license that expires in five years.

et working capital. ​

so be repatriated to the United​States,

x profit to Hermosa Beach.


sidiary, either in Argentina or the United States.

​% and 5​% per​year, respectively, are thought reasonable.

ings in that year. Hermosa believes that a multiple of 6

nit sold (sets) = Unit Sold * (1 + Unit Sold Growth)


e in Argentina per set = Sales price in Argentina per set * (1 + Sales Price Growth)
nufacturing and Shipping Costs = Direct Manufacturing and Shipping Costs * Materials Purchased in Argentina (U.S. dollar equivalent)

0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5


tial Investment + NPV = (Rate, Values)

(Cash Flow in Rs)


CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5

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

from Argentina to Hermosa = Annual project cash flow

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 )

0 + CF1/(1 + K) + CF2/(1 + K)^2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5


tial Investment + NPV = (Rate, Values)

(Cash Flow in Rs)


CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
gentina (U.S. dollar equivalent)

dollar equivalent))
Question 8 Hermosa​Components: Revenue​Growth, Sales​Price, and Currency Risk Scenario. Hermosa Beach​Componen
In​Argentina, the bulbs are sold for the Argentine peso equivalent of ​$60.00 per set. Direct manufacturing cos
neither growing nor​shrinking, 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 local​debt.) 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 as​follows: All investment outl
Depreciation and Investment Recovery. Building and equipment will be depreciated over five years on a​strai
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 as​follows:
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 and​s
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 to​rise, 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. 
Melinda​Deane, a new analyst at Hermosa and a recent MBA​graduate, 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 a​risk-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) $60.00
Direct manufacturing cost in U.S. 40
Transfer price per set (Raw material) 10
Direct costs & indirect cost 5
Pre-tax profit to Hermosa Beach 5
Corporate income tax rate (Argentine taxes) 40%
Argentine inflation Rate 5%
U.S. inflation 1%
Discount rate (Argentina viewpoint) 20%
Discount rate (Parent viewpoint) 18%
Calculate the free cash flows in years 2012 through 2014 from the​project's viewpoint​below: ​(Round to the n
Project Cash Flows In Argentina: Project Viewpoint 2012
PPP Expected exchange Rate (Pesos/$) 3.5000

Annual Units Sold (Set)


Sales price in Argentina per set (in $)
Sales price in Argentina per set (in pesos)
Sales revenue
Less direct manufacturing and shipping costs (Ps)
Less cost of U.S. components at $10/set
Gross profit
Less depreciation
Pre-tax profit
Less 40% Argentina taxes
Net income
Add back depreciation
Annual project cash flow
Sales value in year 5 (multiple of earnings)
Initial investment (Ps) (7000000)
Free cash flow for discounting (Ps) (7000000)

The net present value on this investment from the​project's viewpoint is. ​(Round to the nearest whole​numbe
Method 2

The internal rate of return on this investment from the​project's viewpoint is. (Round to two decimal​places.)
Answer Check

Calculate the free cash flows in years 2012 through 2014 from the​parent's viewpoint​below: ​(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

b) Cash flow from Argentina to Hermosa

Cash flow loss on Hermosa's loss of exports


Less U.S. taxes on export losses
c) Net cash flow reduction after-tax

d) Cash flow from sale of Argentina subsidiary (not taxed)


Total parent cash flow, after-tax (a+b+c+d)
Initial investment ($2,000,000)
Free cash flow to parent for discounting ($2,000,000)

The net present value on this investment from the​parent's viewpoint is. ​(Round to the nearest​dollar.)
Method 2

The internal rate of return on this investment from the​parent's viewpoint is. (Round to two decimal​places.)
Answer Check

The project should be accepted because the prospective investment from the​parent's viewpoint has a positiv
Risk Scenario. Hermosa Beach​Components, Inc., of California exports 24,000 sets of​low-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 local​debt.) Hermosa will be allowed to repatriate all net income and depreciation funds to the United States each year.

would be as​follows: All investment outlays will be made in​2012, and all operating cash flows will occur at the end of years 2013 through
be depreciated over five years on a​straight-line basis. At the end of the fifth​year, 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 their​manufacture, creating​$5 of​pre-tax profit to
e United States​(combined federal and​state/province). There are no capital gains taxes on the future sale of the Argentine​subsidiary, eit
evaluate all domestic and foreign projects.

es volume by 4​% per year. Argentine inflation is expected to average 5​% per​year, so sales price and material cost increases of 7​% and 6​%
costs are not expected to change over the​five-year period. In addition to the assumptions employed​above,
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 Argentine​project's prospective earnings and cash flows in​dollars,
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​% per​annum).
ate in Argentina which reflects Argentine capital costs ​(20​% is her​estimate) and a​risk-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 viewpoint​below: ​(Round to the nearest​dollar.)
2013 2014 2015 2016 2017
3.6386 3.7827 3.9325 4.0883 4.2502

24,000 24960 25958 26997 28077


$60.00 $64.20 $68.69 $73.50 $78.65
218.32 242.85 270.14 300.50 334.27
5239604 6061547 7012430 8112479 9385094
(1746535) (2001632) (2293990) (2629048) (3013046)
(873267) (944166) (1020821) (1103700) (1193307)
2619802 3115749 3697619 4379731 5178741
(700000) (700000) (700000) (700000) (700000)
1919802 2415749 2997619 3679731 4478741
(767921) (966299) (1199048) (1471892) (1791496)
1151881 1449449 1798571 2207838 2687245
700000 700000 700000 700000 700000
1851881 2149449 2498571 2907838 3387245
16123467.995587

1851881 2149449 2498571 2907838 19510713

t is. ​(Round to the nearest whole​number.) 6725072


6725072

point is. (Round to two decimal​places.) 43.92%


0%

rent's viewpoint​below: ​(Round to the nearest​dollar.)


2013 2014 2015 2016 2017
240,000 249,600 259,584 269,967 280,766
(120000) (124800) (129792) (134984) (140383)
120000 124800 129792 134984 140383
(48000) (49920) (51917) (53993) (56153)
72000 74880 77875 80990 84230

508952 568229 635360 711263 796964

(480000) (499200) (519168) (539935) (561532)


192000 199680 207667 215974 224613
(288000) (299520) (311501) (323961) (336919)

3793593
292952 343589 401735 468293 4337868
292952 343589 401735 468293 4337868

t is. ​(Round to the nearest​dollar.) 877195


877195

point is. (Round to two decimal​places.) 29.07%


0%

from the​parent's viewpoint has a positive NPV. ​(Select from the​drop-down menus.)
ar to Argentina under an import license that expires in five years.
market for this type of bulb in Argentina is​stable,
an be replaced by local production. If Hermosa makes the ​investment,

States each year.

d of years 2013 through 2017.


capital may also be repatriated to the United​States, as may the remaining net book value of the plant.

​$5 of​pre-tax profit to Hermosa Beach.


rgentine​subsidiary, either in Argentina or the United States.

ncreases of 7​% and 6​% per​year, respectively, are thought reasonable.

hat a multiple of 6

ear spot rate in 2012 of Ps3.5000​/$

e parent viewpoint capital budget ​(18​%)


iewpoint capital budgets. Is the project under this scenario​acceptable?

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)

Annual unit sold (sets) = Unit Sold * (1 + Unit Sold Growth)


Expected Sales Price In Argentina Per Set = Sales Price In Argentina Per Set * (1 + Sales Price Growth)
Sales price in Argentina per set (in pesos) = Sales Price In Argentina Per Set * Spot Exchange Rate
Sales Revenue = Annual Units Sold (Set) * Sales Price In Argentina Per Set
Direct Manufacturing and Shipping costs (Ps) = Annual Units Sold * Spot Exchange Rate * Materials purchased in Argentina (1

Depreciation = -(Building and equipment * Spot Exchange Rate 2012) / Investment Life

Sales value in year 5 = Net Income * Sales Multiple


Initial investment (Ps) = Total investment * PPP Expected exchange Rate (Pesos/$)

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)

IRR = IRR (Cash Flow in Rs)


0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5

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)

IRR = IRR (Cash Flow in Rs)


0 = CF0 + CF1/(1 + K) + CF2/(1 + K)^ 2 + CF3/(1 + K)^3 + CF4/(1 + K)^4 + CF5/(1 + K)^5
(1 + U.S. inflation Rate)

ls purchased in Argentina (1 + Material Cost Increase)

rgentina (U.S. dollar equivalent))


come tax rate (Argentine taxes)

Exchange Rate In That Year

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