Fin 178 Maxed Practice Problems

Earnings before taxes, EBT (locla currency) 4500 Less corporate income taxes -1575 Net profit of individual subsidary 35% 2925 AVG exchange rate for the perido Net profit of individual subsidary 2925 Consolidated profits (total across units) 8560.556 Total diluted shares outstanding (000s) "New" earnings per share 13.17 EPS change from baseline: -6.77% Chapter 2 spot rate on pesos 12.47 quartize buys in pesos 505,000 $40,497.19 settled in 2 busi Before World War I, $20.61 was needed to buy one ounce of gold. If, at the same time, one ounce of could be purchased in France for FF406.29, what was the exchange rate between French francs and USD 20.61 *= FF USD 1 = 406.29/20.61 The implied French franc/US dollar exchange rate is FF /S. The implied US dollar/French franc exchange rate is USD/FF. Toyota manufactures in Japan most of the vehicles it sells in the United Kingdom. T for the Toyota Tundra truck line is Y 1,650,000. The spot rate of the Japanese yen ag pound has recently moved from Y195/BP to Y189/BP. How does this change the pric Toyota's British subsidiary in British pounds? Mexico and Quartzite. The spot rate for Mexican pesos is Ps12.47/$. If the U.S.-base company Quartzite Inc. buys Ps505,000 spot from its bank on Monday, How much must Quartzite pay?

Period Days Forward C$/euro US$/euro spot — 1.3369 1.3235 1 month 30 1.3398 1.324 2 months 60 1.3425 1.3245 3 months 90 1.3452 1.3248 6 months 180 1.3474 1.3252 12 months 360 1.3498 1.328 Days Forward Prem Period Forward C$/euro on the C$/euro Spot 0 1.3369 1 month 30 1.3398 2.603% 2 months 60 1.3425 2.513% 3 months 90 1.3452 2.483% 6 months 180 1.3474 1.571% 12 months 360 1.3498 0.965% Days Forward Prem Period Forward C$/euro on the C$/euro Spot 0 1.3235 0 1 month 30 1.324 0.453% 2 months 60 1.3245 0.453% 3 months 90 1.3248 0.393% 6 months 180 1.3252 0.257% 12 months 360 1.328 0.340% Spot rate USD ($/Euro) 1.1273 Spot rate RUB (R/$) 61.46 Victoria Exports. A Canadian exporter, Victoria Exports, will be receiving six payments of €12,800 ranging from now to 12 months in the future. Since the company keeps cash balances in both Canadian dollars and U.S. dollars, it can choose which currency to exchange the euros for at the end of the various periods. Which currency appears to offer the better rates in the forward market? On your summer study abroad program in Europe you stay an extra two weeks to travel from Paris to Moscow. You leave Paris with 2,600 euros in your belt pack. Wanting to exchange all of these for Russian rubles, you obtain the following quotes:

1047 The Malaysian ringgit presently trades at 3.135 10,019.14 The hotel informs her that any increase in its room charges will be limited to any increase in the Ma 2.7689% 1.2390% 30 10019.1387559809 Cost today 3.18237538399234 32279.71149 10143.28 Cost after a year 1.239% 89 84.9 Forecast inflation is 1.10% 1.100% 5.899% 4.698% 9.503% a. Calculate whether international parity conditions hold between Japan and the United States. -4.8% -4.7% 4.8% 4.8% 4.8% 25.65 25.65 2.68 The exchange rate between Croatian kunas and U.S. dollars is kn5.6288=$1. 5.6288 Malaysian Island Resort. Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, o RM1,047/day. RM3.1350/$. She determines that the dollar cost today for a 30-day stay would be $10,019.14. 2.7689% annum, while U.S. inflation is expected to be 1.239%. a. How many dollars might Theresa expect to need one year hence to pay for her 30-day vacation? b. By what percent will the dollar cost have gone up? Why? Derek Tosh and Yen-Dollar Parity. Derek Tosh is attempting to determine whether US/Japanese fina ¥89.00/$, while the 360-day forward rate is ¥84.90/$. for Japan, and 5.899% for the US. The 360-day euro-yen deposit rate is 4.698%, and the 360-day euro-dollar deposit rate is 9.503%. b. Find the forecasted change in the Japanese yen/U.S. dollar (¥/$) exchange rate one year from now Starbucks (Croatia). Starbucks opened its first store in Zagreb, Croatia, in October 2010. In Zagreb, Croatian kunas (kn or HRK). In New York City, the price of a tall vanilla latte is $2.68. According to purchasing power parity, is the Croatian kuna overvalued or undervalued?

0.04994 0.14964 investment 100000 Current Spot 0.5821 3 Mon for rate 0.5638 Expect spot 0.6252 a. 171791.788352517 107404.226077994 7404.23 b. 177367.860943597 110890.386661937 10890.39 2. Cece Cao in Jakarta. Cece Cao trades currencies for Sumatra Funds in Jakarta. She focuses nearly all of her time and attention on the U.S. dollar/Singapore dollar ($/S$) cross rate. The current spot rate is $/S$. After considerable study, she has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming days, probably to about $/S$. She has the following options on the Singapore dollar to choose from: 3. Kapinsky Capital Geneva (B). Christoph Hoffeman of Kapinsky Capital now believes the Swiss franc will appreciate versus the U.S. dollar in the coming 3-month period. He has $100,000 to invest. The cur-rent spot rate is $0.5821/SF, the 3-month forward rate is $0.5638/SF, and he expects the spot rates to reach $0.6252\/SF in three months .a. Calculate Christoph’s expected profit assuming a pure spot market speculation strategy. b. Calculate Christoph’s expected profit assuming he buys or sells SF three months forward.

10,000,000 10,000,000 9993.95 9976.89 6.05 23.11 0.0605 0.2316353092 0.24214650 0.4633 230000 230000 15 30.00 0.06399 0.06875 46000 46000 184000 184000 0.53% 0.57% 180 360 $1,592.64 $1,208.75 1523.45 1. The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the simple and annualized yields for the 3-month and 6- month Tresury bills auctioned on March 9, 2009, listed here. 2. Madeoff's Mortgage. Bernie Madeoff pays $ for a new four-bedroom 2,400-square-foot home outside Tonopah, Nevada. He plans to make a % down payment, but is having trouble deciding whether he wants a -year fixed rate (%) or a -year fixed rate (%) mortgage. a. What is the monthly payment for both the - and -year mortgages, assuming a fully amortizing loan of equal payments for the life of the mortgage? b. Assume that instead of making a % down payment, he makes a % down payment, and finances the remainder at % fixed interest for years. What is his monthly payment? c. Assume that the home's total value falls by 25%. If Bernie sells the house at the new market value, what would be his gain or loss on the home and mortgage, assuming all of the mortgage principal remains? Use the same assumptions as in part a.

0.85 to answer the following questions. Component Value Italian risk-free cost of debt in euros 3.94% 0.0394 Ferrari's cost of debt in euros 3.93% 0.0393 Italian corporate income tax rate 29% 0.29 Ferrari's prospective beta 0.85 Italian equity market risk premium (equity return over risk-fr 5.30% 0.053 Ferrari's shares outstanding 167,000,000 Ferrari's share price in euros 54 Ferrari's debt outstanding in euros 453,000,000 0.027903 0.08 9018000000 9,471,000,000 0.95 0.05 0.08 10.04% 0.10406 0.037 0.036 the domestic beta is estimated at 0.99 0.96 the international beta is estimated at 0.77 0.72 0.55 0.088 8.90% Ferrari had been owned by Fiat (Italy), and had never calculated its own cost of capital before, one independent of Fiat. It now needed to, and one of its first challenges was estimating its beta. With only two months of trading to base it on, the corporate treasury group had started with what were considered "comparable firms", which for Ferrari, meant firms in the luxury goods industry, not automotive. Luxury goods were historically less volatile than the market, so the initial guess on Ferrari's beta was Use the assumptions in the popup table, Ganado's Cost of Capital. Maria Gonzalez, Ganado's Chief Financial Officer, estimates the risk-free 3.70%, the company's credit risk premium is 3.60%, 0.99, 0.77, and the company's capital structure is now 55% debt. The expected rate of return on the market portfolio held by a well-diversified domestic investo 8.80%

111 4.7 an effective tax rate of and a market risk premium of Company A 0.89 0.93 Company sales 10.5 beta for Cargill sounds reasonable. Company's beta 0.8 Credit rating AA Risk Free rate 0.045 Market risk pre 0.045 Weighted avera 0.0688 Corporate tax ra 0.48 Debt to total cap 0.32 Equity to total c 0.68 International s% 0.11 0.081 0.035776 6.65% Cargill's Cost of Capital. Cargill is generally considered to be the largest privately held company in the world. Headquartered in Minneapolis, Minnesota, the company has been averaging sales of over $112 billion per year over the past five-year period. Although the company does not have publicly traded shares, it is still extremely important for it to calculate its weighted average cost of capital properly in order to make rational decisions on new investment proposals. Assuming a risk- free rate of 4.50%, 48%, 4.50%, estimate the weighted average cost of capital first for companies A and B, and then make a "guesstimate" of what you believe a comparable WACC would be for Cargill. 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 would then fall between say 0.80 and 1.00. If the higher degree of international sales was interpreted as increasing risk, beta would be on the higher end; yet being a commodity firm in the current market, its beta would rarely surpass 1.0. Thus, an estimate of

5,000,000 for one year at 0.07875 7.375 interest. a. What is the dollar cost of this debt if the pound depreciates from 2.029 2.026 to 1.948 1.946 b. What is the dollar cost of this debt if the pound appreciates from 2.029 2.026 to 2.163 2.164 10145000 10507025 3.56850665352393 10145000 11666681.25 14.9993223262691 Foreign Exchange Risk and the Cost of Borrowing Swiss Francs. The chapter demonstrated that a SF1.4 1,400,000 1,600,000 1.52 1.47 a 0.05028 5.079 0.35 38 a. 1.52 1.47 b. 1.46 1.39 c. 1.406 1.358 d. 1.612 1.583 921052.631578947 1470392 912153.846153846 Copper Mountain Group (U.S.). The Copper Mountain Group, a private equity firm headquartered in 5000000 .07875 2.0290 1.9480 over the year? 2.0290 2.1630 over the year? million, a one-year period, an initial spot rate of SF1.5200/$, 5.028% cost of debt, and a 35% tax rate, what is the effective after-tax cost of debt for one year for a U.S. dollar-based company if th SF1.5200/$ SF1.4600/$ SF1.4060/$ SF1.6120/$

-8898.78542510106 -0.009661538461538 -0.6280% €85,000,000 85,000,000 70,000,000 at a time when the exchange rate is 1.3443 1.3321 0.0655 6.95 0.026 3.4 Question content area bottom Part 1 year 0 1.3443 114265500 1 1.3093482 -7289796.1035 2 1.2753051468 -7100261.4048 3 1.242147213 -112498167.71 5567500 3.78% 9730000 90,567,500 80137500 21000000 22,000,000 a. Borrow in Eurodollars in London at 0.0735 7.35 per annum b. Borrow 167638800 174,295,000 in Hong Kong at 0.0705 7.05 7.9828 7.9225 for U.S. dollars. 22543500 23617000 179457335.4 186582797.5 7.9605 7.9003598044 McDougan Associates (USA). McDougan Associates, a U.S.-based investment partnership, borrows $1.3443/€. The entire principal is to be repaid in three years, and interest is 6.550% per annum, paid annually in euros. The euro is expected to depreciate vis-à-vis the dollar at 2.6% per annum. What is the effective cost of this loan for McDougan? Complete the following table to calculate the dollar cost of the euro-denominated debt for years 0 through 3 Morning Star Air (China). Morning Star Air, headquartered in Kunming, China, needs US$21,000,000 for one year to finance working capital. The airline has two alternatives for borrowing: US$21,000,000 7.15% HK$160,500,900 6.95% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.6429/US$ At what ending exchange rate would Morning Star Air be indifferent between borrowing U.S. dollars and bo

Westminster Insurance Company. Westminster Insurance Company plans to sell 2200000 of eurocommercial paper with a 90 maturity and discounted to yield 0.057 1.01425 2169090.4609 . 16400000 18040000 4400000 Common stock 6500000 Retained earnin Current exchange rates Malaysian ringgit per dollar 4.1 Mexican pesos per dollar 11 4000000 2000000 17000000 23000000 40000000 42.50% 57.50% $2,200,000 90-day 5.70% per annum. What will be the immediate proceeds to Westminster Insurance? Assume a 360-day year. Adamantine Architectonics. Adamantine Architectonics consists of a U.S. parent and wholly owned subsidiaries in Malaysia (A-Malaysia) and Mexico (A-Mexico). Selected portions of their non- consolidated balance sheets, translated into U.S. dollars, are shown in the popup window, What are the debt and equity proportions in Adamantine's consolidated balance sheet? What is the debt proportion in Adamantine's consolidated balance sheet? A-Malaysia (in ringgits) A-Mexico (in pe Long-term debt Long-term debt Shareholders' equity Shareholders' e Adamantine Architectonics (non-consolidated) Investment in subsidiaries (US dollars): Parent long-term in A-Malaysia in A-Mexico

ctice 1.2 in the chapter), ne of the part owners of currency, the Japanese yen, ween the Mexican peso and the dollar and the Japanese yen (¥ MXN 17 MXN $ MXN 18.00 1 MXN ¥100.00 17 Pesos $1 100 Yen 0.9444444444 1 18 Pesos $1 94.444444444 2.28 ur he UR rubles 59.468 $1.06 63.30 S $1.00 63.30

949466.088 s JUST USE THE RECIPROCAL zilian reais and, subsequently, inducing an economic recession within the ian reais were to fall in value to R$3.00/$, with all other earnings and exchange mpnay Brazilian Subsidary German subsadary Chinese Subsidary

6250 4500 2500 -1562.5 -1800 -750 25% 4687.5 40% 2700 30% 1750 3 0.7018 7.75 1562.5 3847.2499288 225.80645161 should be 10.77 Sat and Sun not business days* iness days on Monday gold d U.S. dollars? 406.29 $19.71 $0.0507 The base platform gainst the British ce of the Tundra to ed

$8,461.54 $8,730.16 3.17% inst the British pound itself. enspan's memoir, on Amazon.com, exican peso from 3.15 pesos per dollar depreciation devaluation, appreciation, se, a devaluation. n terms of the

Proceeds of Difference 12700 over spot $16,978.63 $0.00 $17,015.46 $36.83 $17,049.75 $71.12 $17,084.04 $105.41 $17,111.98 $133.35 $17,142.46 $163.83 Proceeds of Difference 12700 over spot $16,808.45 $0.00 $16,814.80 $6.35 $16,821.15 $12.70 $16,824.96 $16.51 $16,830.04 $21.59 $16,865.60 $57.15

GBP CHF CAD AUD HKD 12.2865 7.9237 7.7063 7.6637 1.6033 1.0334 1.0058 0.1305 1.5954 1.0282 0.9942 0.1298 1.5524 0.9726 0.9677 0.1262 0.6442 0.6268 0.6237 0.0814 132.2445 85.2352 82.8521 82.4535 10.8504 1.1936 0.7686 0.7472 0.7433 0.0971 1.582 1.0178 0.9894 0.9847 0.1288 B. 6.218% 4.435% 5.235% 5.573% 3.211% 2.303% es? (Assume that the U.S. dollar is the home currency.)

alaysian cost of living. Malaysian inflation is expected to be days one year from now. The present charge for a luxury suite plus meals in Malaysian ringgit (RM) is ancial conditions are at parity. The current spot rate is a flat w. , the price of a tall vanilla latte is

ploring covered interest arbitrage possibilities. He wants to invest ed the following exchange rate and interest rate quotes. Is CIA profit possible? If so, how? nvest trage with Denmark. Using the following quotes, can Heidi make a covered interest arbitrage (CIA) profit

Settles march 1.4228 June 1.4162 e has should invest in U.S. dollars for three months, or make a CIA investment in the Swiss franc. He faces the ?

. Compare the alternatives and make a recommendation. 57,603,434.71 6 0.08622 12,696,571.97 Interest Princpal End Loan Value

e rate to be or is

ds combined with bank debt is Thunderhorse's weighted average cost of capital?

Cost of Cost of Cost of Cost of 12% 8% 14% 6% 18% 12% 16% 10% 22% 16% 24% 18%

Company B Cargill 46 111 0.71 0.89 A AA 0.045 0.045 0.045 0.045 0.0714 0.0682 0.48 0.48 0.43 0.25 0.57 0.75 0.34 0.54 0.07695 0.08505 0.037128 0.035464 5.98% 7.27%

firm borrowing in a foreign currency could potentially end up paying a very different effective rate of int Boulder, Colorado, borrows he exchange rate at the end of the period was:

- - s 3. Enter a positive number for a cash inflow and negative for a cash outflow. (Round the amount to the nearest orrowing Hong Kong dollars?

22000000 71500000 11000000 5000000 18000000 esos)

post tax return = 10%*(1-27%)

t?

e following quotes:

terest than what it expected. Using the same baseline values of a debt principal of

whole number and the exchange rate to four decimal places.)