2023 practice exam II_Qs (1)
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1.
Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost?
A) Lost $0.04 per € or $2,500
B) Made $0.04 per € or $2,500
C) Lost $0.06 per € or $3,750
D) none of the options
2.
If you think that the dollar is going to appreciate against the euro, you should A) buy put options on the euro.
B) sell call options on the dollar.
C) buy call options on the euro.
D) none of the options
Answer problems 3-4 based on the stock market data given by the following table.
Correlation Coefficients
Telmex
Mexico
World
SD
(%)
¯
R
(%)
Telmex
1.00
.90
0.60
18
?
Mexico
1.00
0.75
15
14
World
1.00
10
12
The above table provides the correlations among Telmex, a telephone/communication company
located in Mexico, the Mexico stock market index, and the world market index, together with the
standard deviations (
SD
) of returns and the expected returns (
¯
R
). The risk-free rate is 5%.
Both the domestic beta, β
T
M
, and the world beta, β
T
W
, of Telmex are 1.08.
3.
Suppose the Mexican stock market is segmented from the rest of the world. Using the
CAPM paradigm, estimate the equity cost of capital of Telmex.
A. 14.72%
B. 12.56%
C. 9.72%
D. 7.56%
4.
Suppose now that Telmex has made its shares tradable internationally via cross-listing on
NYSE. Again using the CAPM paradigm, estimate Telmex’s equity cost of capital. A. 14.72%
B. 12.56%
C. 9.72%
D. 7.56%
5.
The required return on equity for a levered firm is 10.60 percent. The debt to equity ratio is
1/2, the tax rate is 40 percent, the pre-tax cost of debt is 8 percent. Find the cost of capital if
this firm were financed entirely with equity. A) 10 percent
B) 12 percent
C) 8.67 percent
D) none of the options 6.
For the following two questions consider a project with the following data.
i=r
debt
=6%
CF
0
=
-$60,000
K
u
=r
asset
=12%
CF
1-2
=
$39,800=25,000*($5-$3)*(1-34%)+$20,000*0.34
K
l
=r
equity
=27.84%
CF
3
=
$43,100=$39,800+$5,000*(1-0.34)
After-tax OCF
1-3
=
25,000*($5-$3)*(1-34%)=$33,000
After-tax salvage value=
$5000*(1-0.34)=
$
3300
K=r
WACC
=8.74%
τ
=Tax rate=34%
Debt-to-equity ratio=4 Risk-free rate=2%
The 3-year project requires equipment that costs $60,000. If undertaken, the shareholders will contribute $12,000 cash and borrow $48,000 at 6% with an interest-only loan with a maturity of 3 years and annual interest payments. The equipment will be depreciated straight-line to zero over the 3-year life of the project. There will be a pre-tax salvage value of $5,000. There are no other start-up costs at year 0. During years 1 through 3, the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs.
a.
What is the NPV of the project using WACC methodology?
b.
Using APV methodology, what is the tax benefit of depreciation in years 1 to 3?
c.
Using APV methodology, what is the tax benefit of paying interest in years 1 to 3?
d.
What is the present value of the project using the APV methodology?
7.
Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Use a money market hedge to redenominate this one-year payable into a pound-denominated payable with a one-year maturity. The spot cross-rate (between pounds and euro) is £0.795912/ €. The risk-free interest rates are 2% in Italy and 3% in the U.K.
a.
Explain the process of a money market hedge.
b.
Conduct the cash flow analysis of the money market hedge.
8.
Which of the following is not a type of operational technique for hedging foreign exchange transaction exposure? A.
Swap strategy
B.
Choice of the invoice currency
C.
Lead/lag strategy
D.
Exposure netting
9.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. Assume that the forward rate is the best predictor of the future spot rate. The future dollar cost of meeting this obligation using the option hedge is A.
$6,450,000.
B.
$6,545,400.
C. $6,653,833.
D. $6,880,734.
10. Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability? A.
Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at
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i£.
B.
Buy a call option on £100,000 with a strike price in dollars.
C.
Take a long position in a forward contract on £100,000 with a 3-month maturity.
D.
all of the options
11. The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is
A.
transaction exposure.
B.
translation exposure.
C.
economic exposure.
D.
none of the options
12. When exchange rates change, A.
U.S. firms that produce domestically and sell only to domestic customers will be unaffected.
B.
U.S. firms that produce domestically and sell only to domestic customers can be affected
if they compete against imports.
C.
U.S. firms that produce domestically and sell only to domestic customers will be affected, but only if they borrow in foreign currency to finance their domestic operations.
D.
U.S. firms that produce domestically and sell only to domestic customers will be unaffected, and U.S. firms that produce domestically and sell only to domestic customers can be affected if they compete against imports.
13. Foreign exchange economic exposure consists of asset exposure and operating exposure. What is the objective of managing operating exposure? A.
Stabilize cash flows in the face of fluctuating exchange rates.
B.
Selecting low cost production sites.
C.
Increase the variability of cash flows in the face of fluctuating exchange rates.
D.
Both A and C are correct.
14. Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose there are only three states of the world and each state is equally likely to
occur. The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world. State
Probability
P*
S
S× P*
1
1/3
£1,000
$1.40
/£
$1,400
2
1/3
£1,000
$1.50
/£
$1,500
3
1/3
£1,000
$1.60
/£
$1,600
Which of the following statements is most correct? A.
The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.
B.
The firm faces substantial exchange rate risk since the local currency price of the asset and the exchange rate are positively correlated.
C.
The firm's exchange rate exposure can be completely hedged with derivatives written on
the British pound.
D.
Since randomness is involved, no hedging is possible.
15. Calculate the cumulative translation adjustment under the current rate method for this U.S. MNC translating the balance sheet and income statement of a French subsidiary, which keeps its books in euro, but that is translated into U.S. dollars using the current rate method,
the reporting currency of the U.S. MNC. The table presents the balance sheet and income statement in euro. The subsidiary is at the end of its first year of operation. The historical exchange rate is $1.60/€1.00 and the most recent exchange rate is $2.00/€.
Local Currency Current Rate
Balance Sheet
1
Cash
€
2,100
$
4,200
2
Inventory (current Value
= €1,800)
€
1,500
$
3,000
3
Net fixed assets
€
3,000
$
6,000
4
Total Assets
€
6,600
$
13,200
5
Current liabilities
€
1,200
$
2,400
6
Long-term debt
€
1,800
$
3,600
7
Common stock
€
2,700
$
4,320
8
Retained earnings
€
900
$
9
CTA
10
Total L&E
€
6,600
$
13,200
Income Statement
11
Sales Revenue
€
10,000
$
17,778
12
COGS
€
7,500
$
13,333
13
Depreciation
€
1,000
$
1,778
14
NOI
€
1,500
$
2,667
15
Tax(40%)
€
600
$
1,067
16
Profit after tax
€
900
$
1,600
17
Foreign Exchange gain (loss)
18
Net income
€
900
$
1,600
19
Dividends
€
0
$
0
20
Addition to Retained Earnings
€
900
$
1,600
A) $1,280
B) $800
C) $640
D) $0
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