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 andsell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with a salvage value of$12,000,000. This salvage value would be paid by the government in Singapore to Kittle in exchange for ownership of the subsidiary. The expectedexchange rate of the Singapore dollar of $0.50 over the life of the project.Kittle managers are worried about the uncertainty of the value of the Singapore dollar. While they expect that the exchange rate will be $0.50, theyrecognize that this value may fluctuate. Thus, they decide to S$3,000,000 in cash flows per year, while any additional cash flows beyond this thresholdwould not be hedged. The forward rate that Kittle will use to hedge the S$3,000,000 is $0.48.The following table shows a key subsection of Kittle's capital budgeting analysis that is affected by this hedging strategy.Complete row (19a), (19b), and (19c) of the table, filling in the hedged, unhedged, and total cash flows to the parent (respectively) in each of the fouryearsHint: Do not forget to account for the salvage value in year 4.16. S$ Remitted After Tax Withholdings. Hedged After-Tax S$16aCashflows16b. Unhedged S$ Cashflows (16)-(16a)17. Salvage Value18a. Forward Rate on S$18b. Expected Future Spot Rate on S$19a. Hedged Cash Flows to Parent19b. Unhedged Cash Flow to Parent19c. Total Cashflow to ParentYear0LAtAYear 1S$5,400,000S$3,000,000S$2,400,000$0.48$0.50tASAYear 2S$5,400,000S$3,000,000S$2,400,000$0.48$0.50LAAYear 3S$8,424,000S$3,000,000S$5,424,000$0.48$0.50AA+AUU 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 andsell guitars locally in Singapore, and needs assistance with capital budgeting. The duration of this project is four years, with a salvage value of$12,000,000. This salvage value would be paid by the government in Singapore to Kittle in exchange for ownership of the subsidiary. The expectedexchange rate of the Singapore dollar of $0.50 over the life of the project.Kittle managers are worried about the uncertainty of the value of the Singapore dollar. While they expect that the exchange rate will be $0.50, theyrecognize that this value may fluctuate. Thus, they decide to S$3,000,000 in cash flows per year, while any additional cash flows beyond this thresholdwould not be hedged. The forward rate that Kittle will use to hedge the S$3,000,000 is $0.48.The following table shows a key subsection of Kittle's capital budgeting analysis that is affected by this hedging strategy.›), and (19c) of the table, filling in the hedged, unhedged, and total cash flows to the parent (respectively) in each of the fourcount for the salvage value in year 4.Year0ax Withholdings5$flows (16)-(16a)$bot Rate on S$s to Parentw to ParentarentLALALAYear 1S$5,400,000S$3,000,000S$2,400,000$0.48$0.50HAtAYear 2S$5,400,000S$3,000,000S$2,400,000$0.48$0.50tALA+AYear 3S$8,424,000S$3,000,000S$5,424,000$0.48$0.50tAtAYear 4S$9,288,000S$3,000,000S$6,288,000S$12,000,000$0.48$0.50

Introduction: Hedging reduces the risk of transaction by eliminating the volatility of currency…

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 a salvage value of $12,000,000. This salvage value would be paid by the government in Singapore to Kittle in exchange for ownership of the subsidiary. The expected exchange rate of the Singapore dollar of $0.50 over the life of the project. Kittle managers are worried about the uncertainty of the value of the Singapore dollar. While they expect that the exchange rate will be $0.50, they recognize that this value may fluctuate. Thus, they decide to S$3,000,000 in cash flows per year, while any additional cash flows beyond this threshold would not be hedged. The forward rate that Kittle will use to hedge the S$3,000,000 is $0.48. The following table shows a key subsection of Kittle's capital budgeting analysis that is affected by this hedging strategy. Complete row (19a), (19b), and (19c) of the table, filling in the hedged, unhedged, and total cash flows to the parent (respectively) in each of the four years Hint: Do not forget to account for the salvage value in year 4. 16. S$ Remitted After Tax Withholdings . Hedged After-Tax S$ 16aCashflows 16b. Unhedged S$ Cashflows (16)-(16a) 17. Salvage Value 18a. Forward Rate on S$ 18b. Expected Future Spot Rate on S$ 19a. Hedged Cash Flows to Parent 19b. Unhedged Cash Flow to Parent 19c. Total Cashflow to Parent Year 0 $ $ $ Year 1 S$5,400,000 S$3,000,000 S$2,400,000 $0.48 $0.50 $ $ Year 2 S$5,400,000 S$3,000,000 S$2,400,000 $0.48 $0.50 $ $ $ Year 3 S$8,424,000 S$3,000,000 S$5,424,000 $0.48 $0.50

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS