Morning Star Air (China). Morning Star Air, headquartered in Kunming, China, needs US$24,000,000 for one year to finance working capital. The airline has two alternatives for borrowing: a. Borrow US$24,000,000 in Eurodollars in London at 7.30% per annum b. Borrow HK$186,448,800 in Hong Kong at 7.10% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.7687/US$ for U.S. dollars. At what ending exchange rate would Morning Star Air be indifferent between borrowing U.S. dollars and borrowing Hong Kong dollars?

Morning Star Air (China). Morning Star Air, headquartered in Kunming, China, needs US$24,000,000 for one year to finance working capital. The airline has two alternatives for borrowing: a. Borrow US$24,000,000 in Eurodollars in London at 7.30% per annum b. Borrow HK$186,448,800 in Hong Kong at 7.10% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.7687/US$ for U.S. dollars. At what ending exchange rate would Morning Star Air be indifferent between borrowing U.S. dollars and borrowing Hong Kong dollars?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1ST

See similar textbooks

Similar questions

AireAsia, headquartered in Kunming, China, needs US$5,000,000 for one year to finance working capital (assume annual compounding). The airline has two alternatives for borrowing: Borrow US$5,000,000 in Eurodollars in London at 2.50% per annum Borrow HK$38,750,000 in Hong Kong at 4.00% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.75/US$ for U.S. dollars. At what ending exchange rate would AireAsia be indifferent between borrowing U. S. dollars and borrowing Hong Kong dollars?
Q1. Analytical Question: China Eastern, headquartered in Shanghai, needs US $5,000,000 for one year to finance working capital. The airline has two alternatives for borrowing: a. Borrow US$5,000,000 in eurodollars in London at 7.25% per annum. b. Borrow HK $39,000,000 in Hong Kong at 7.00% per annum, and exchange these Hong Kong dollars at the present exchange rate of HK$7.8/US$ for U.S. dollars. At what ending exchange rate would China Eastern be indifferent between borrowing U.S. dollars and borrowing Hong Kong dollars? Show your calculation and discuss.
AMD needs $50 million for 1 year to finance its working capital. The company has two borrowing alternatives:(i) to borrow the full amount in Eurodollars in London at 3.20 % per annum(ii) to borrow HK$ 390 million in Hong Kong at 1.01 % per annum and exchange these HK$ at the then present exchange rate of HK$ 7.8000 per I USD.Calculate the ending exchange rate where AMD would be indifferent between borrowing in USD and HK$.
A Ghanaian multinational firm has two options in sourcing funds. The first option is to raise cedi on the local financial market at 25% per annum. The second option is to borrow dollars from a US bank at 6% per annum, convert it into cedi and pay the loan in one year. Assuming that the dollar assuming the dollar appreciates by 15% against the cedi by the end of the year when the loan is due, calculate which of the two options is cheaper.
Smart banking corp can borrow $5 million at 6 percent annualized.it can use the proceeds to invest in Canadian dollars at 9 percent annualized over a 6-day period. The canadian dollar is worth $.95 and is expected to be worth $.96 in 6 days. Based on this information, should smart banking corp. Borrow U.S dollars and invest in Canadian dollars? What would be the gain or loss in U.S dollars?
Required: Zeda Incorporated, a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK14,600,000 at a rate of 4 percent per annum. The normal borrowing rate is 6 percent in dollars and 5.5 percent in Danish krone. The loan schedule calls for the principal to be repaid in three equal annual installments. What is the present value of the benefit of the concessionary loan? The current spot rate is DKK 5.60 per $1.00 and the expected inflation rate is 3 percent in the United States and 2.5 percent in Denmark. Note: Round the exchange rates to two decimal places. Round the intermediate calculations and final answer to nearest whole number. Present value of the benefit of the concessionary loan
Required: Zeda Incorporated, a U.S. MNC, is considering making a fixed direct Investment In Denmark. The Danish government has offered Zeda a concessionary loan of DKK14,150,000 at a rate of 4 percent per annum. The normal borrowing rate is 6 percent in dollars and 5.5 percent in Danish krone. The loan schedule calls for the principal to be repaid in three equal annual Installments. What is the present value of the benefit of the concessionary loan? The current spot rate is DKK 5.60 per $1.00 and the expected inflation rate is 3 percent In the United States and 2.5 percent in Denmark. Note: Round the exchange rates to two decimal places. Round the Intermediate calculations and final answer to nearest whole number. Answer is complete but not entirely correct. Present value of the benefit of the concessionary loan S 850,918
Required: Zeda Incorporated, a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK14,000,000 at a rate of 4 percent per annum. The normal borrowing rate is 6 percent in dollars and 5.5 percent in Danish krone. The loan schedule calls for the principal to be repaid in three equal annual installments. What is the present value of the benefit of the concessionary loan? The current spot rate is DKK 5.60 per $1.00 and the expected inflation rate is 3 percent in the United States and 2.5 percent in Denmark. Note: Round the exchange rates to two decimal places. Round the intermediate calculations and final answer to nearest whole number.
Required: Zeda Incorporated, a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish government has offered Zeda a concessionary loan of DKK14,750,000 at a rate of 4 percent per annum. The normal borrowing rate is 6 percent in dollars and 5.5 percent in Danish krone. The loan schedule calls for the principal to be repaid in three equal annual installments. What is the present value of the benefit of the concessionary loan? The current spot rate is DKK 5.60 per $1.00 and the expected inflation rate is 3 percent in the United States and 2.5 percent in Denmark. Note: Round the exchange rates to two decimal places. Round the intermediate calculations and final answer to nearest whole number. Present value of the benefit of the concessionary loan
Denim Industries can borrow its needed financing for expansion using one of two foreign lending facilities. It can borrow at a nominal annual interest rate of 9% in Mexican pesos or it can borrow at 4% in Canadian dollars. If the peso is expected to depreciate by 11.73% and the Canadian dollar is expected to appreciate by 2%, which loan has the lower effective annual interest rate? The effective annual interest rate of the loan in Mexican pesos is%. (Round to two decimal places.)
4. Portland Ltd, an Australian firm, needs AUD10 million to finance a new project in USA. The company has the capacity to borrow either from an Australian bank which offers 7% (AUD loan) annual interest rate or from a USA bank which offers 6% (USD loan) annual interest rate. The loan expects to settle after one year period. You found following additional information: The current spot is USD1.0654/AUD One year forward rate is USD1.0455/AUD. Required: Recommend the loan which provides better off to the company.
Suppose that Kittle Co. is a U.S. based MNC that is considering setting up a subsidiary in Singapore. Kittle would like this subsidiary to produce and sell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with an initial investment of S$20,000,000 (Singapore dollars). Kittle managers have conducted a capital budgeting analysis with the assumption that the exchange rate will be $0.50 over the life of the project. However, Kittle management acknowledges the possibility that the value of the Singapore dollar will fluctuate over time. To that end, Kittle is considering two alternative scenarios: one in which the Singapore dollar is strong relative to the U.S. dollar and one in which the Singapore dollar is weak against the U.S. dollar. The following table shows one section of Kittle's capital budgeting analysis, under the scenario where the Singapore dollar is strong relative to the U.S. dollar. Complete row 22 of the…