PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 15PS
Portfolio risk To calculate the variance of a three-stock portfolio, you need to add nine boxes:
Use the same symbols that we used in this chapter: for example, x1 = proportion invested in stock 1 and σ12 = covariance between stocks 1 and 2. Now complete the nine boxes.
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Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows: Base price level 100 Current U.S. price level 105 Current South African price level 111 Base rand spot exchange rate $ 0.188 Current rand spot exchange rate $ 0.171 Expected annual U.S. inflation 7% Expected annual South African inflation 5% Expected U.S. one-year interest rate 10% Expected South African one-year interest rate 8% Required:
a. The current ZAR spot rate in USD that would have been forecast by PPP.Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
b. Using the IFE, the expected ZAR spot rate in USD one year from now.Note: Do not round intermediate calculations. Round your answer to 4 decimal places.
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Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR11,000. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 3,300, 4,300, 5,290, 6,280, and 7,250. The parent firm's cost of capital in dollars is 9,5 percent. Long-run inflation is forecasted to be 3 percent per annum
in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75.
Required:.
Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. - NPV in USD using fisher effect
Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. - NPV in USD using PPP rates
Are the two USD NPs different or the same?
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Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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