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##### Information for Questions 1 and 2: Assume the...

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Information for Questions 1 and 2: Assume the following information (1 year rates): U.S. deposit rate = 12% U.S. borrowing rate = 13% Swiss deposit rate = 8% Swiss borrowing rate = 10% Swiss forward rate for = $.42 Swiss franc spot rate = $.41 The US firm AQH Inc. denominates its exports in Swiss francs and will receive SF2,000,000 in 1 year. 1. (2 points) AQH Inc. does a forward hedge. What will be the value of the money that AHQ will receive one year from now? A) $800,000. B) $835,044. C) $826,444. D) $840,000. 2. (2 points) AQH Inc. does a money market hedge. What will be the value of the money that AHQ will receive one year from now? A) $832,000. B) $834,910. C) $836,550. D) $838,830. 3. Mata Co. will receive Euros 1,000,000 in 30 days. Exercise price for put = $1.60 Premium = $.03 Spot rate = $1.58 30 day forward rate = $1.62 After 30 days the spot rate is $1.60 What is the total amount (net of option premium) received if the firm purchases 1,000,000 put options to eliminate the downside risk? A) $1,570,000. B) $1,610,000. C) $1,600,000. D) $1,590,000. E) $1,580,000. 4. (2 points) Metam Inc. will receive E2,000,000 in 365 days. Interest rates are: U.S. Euro 365 day borrowing rate 8% 10% 365 day deposit rate 7% 9% Forward rate of the Euro is $1.50 and the spot rate is $1.48. If Metam uses a money market hedge, in 365 days it will get: A) $2,778,145 B) $2,879,273 C) $2,890,512 D) $2,911,110 E) $2,920,210 5. (2 points) A call option on Euros with an exercise price of $1.62, a 180 day expiration, has a premium of $.04 per unit. A put option on Euros with an exercise price of $1.62, a 180 day expiration date, has a premium of $.05 per unit. After 180 days the exchange rate is $1.59 per Euro. An European firm had purchased options to cover future payables of $5,000,000 in 180 days. It will exercise the option in 180 days (if at all). Determine the total amount of dollars to be paid (after accounting for option premium) by the European firm. A) $5,200,000. B) $5,000,000. C) $4,800,000. D) $4,600,000. E) $4,400,000. 6. (2 points) Atlas Inc. will receive E1,000,000 in 180 days. Today?s spot rate of the Euro is $1.402., and the 180 day forward rate is $1.416. The probability distribution for the spot rate in 180 days is: Possible Spot Rate in 180 Days Probability $1.40 12% $1.41 18% $1.42 38% $1.43 32% The probability that the forward hedge will result in less dollars received than not hedging is: A) 12%. B) 30%. C) 58.6%. D) 66.8%. E) 70%. 7. (2 points) Mand Corp. uses a forward hedge to hedge its Yen (Y) receivables. Mand has identified its net exposure for the next 30 days to the Yen as being Y500,000,000. The 30-day forward rate is $.0225. Mand?s CFO has indicated that the possible values of Yen at the end of next month are $.0222 and $.0227, with probabilities of .45 and .55, respectively. What is the expected real cost of hedging receivables? A) $0. B) ?$12,500. C) $12,500. D) none of these. 8. Which one of the following does not represent an obligation? A) currency option B) currency swap C) structured loan D) forward contract 9. Suppose interest rate parity exists, and there are no transaction costs. Which two of the following hedges will have the same result? A) money market; futures B) money market; options C) money market; forward D) forward; options 10. Suppose a perfect hedge is not available to eliminate transaction exposure. A firm may consider which of the following methods to reduce exposure? A) Leading, lagging and cross-hedging B) Lagging, arbitrage and currency diversification C) Leading, lagging and arbitrage D) Leading, portfolio risk and cross-hedging E) Leading, lagging and disintermediation 11. The US firm Juniper has no subsidiaries in Canada. It has sales to Canadian customers amounting to CAD100 million, while its CAD denomin?ated expenses amount to CAD40 million. If it shifts its material orders from its Canadian suppliers to U.S. suppliers, it could reduce CAD denominated expenses by CAD10 million and increase dollar denominated expenses by $8million. This strategy would _______ the Juniper?s exposure to changes in the CAD?s movements against the U.S. dollar. Juniper is likely to perform better when the CAD is valued _______ relative to the dollar. A) reduce; high B) reduce; low C) increase; low D) increase; high 12. If the Australian dollar appreciates against the U.S. dollar, the consolidated earnings of a U.S. company with a subsidiary in Australia will be _______. A) negative B) adversely affected C) favorably affected D) unaffected 13. Mex, Inc. wishes to estimate its degree of economic exposure in pesos. It has applied regression analysis to determine how the percentage change in its cash flow is related to the percentage change in the pesos. A _______ and statistically significant slope coefficient resulting from the regression implies that the cash flows are _______ related to the percentage changes in the pesos. A) positive; positively B) positive; negatively C) negative; positively D) none of these 14. Mercedes exports cars to U.S. dealerships, which are priced in euros. Demand for these cars declines when the euro is strong. Mercedes also produces some cars in the U.S. and these cars are priced in dollars. Mercedes could reduce its economic exposure by: A) closing down its U.S. plants B) producing more cars in the U.S. C) relying more on German suppliers for parts. D) pricing its exports in dollars. 15. Suppose for an MNC, revenues and costs are equally sensitive to exchange rate movements. The MNC may decrease its economic exposure by changing its operations to move the sources of costs or revenues to other countries so that: A) for each foreign currency cash inflows exceed cash outflows. B) for each foreign currency cash outflows exceed cash inflows. C) for each foreign currency cash inflows equal cash outflows. D) none of these. 16. Which of the following is not a disadvantage of direct foreign investment? A) Cost of establishing a foreign subsidiary B) Inflation and currency risks C) Political risk D) All of the above 17. (2 points) Tampa Corp. is planning a two year project in Australia with a $50 million initial investment. The firm?s cost of capital is 14%. The required rate of return on this project is 20%. The project is expected to generate cash flows of A$25 million in Year 1 and A$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $.70 per A$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value (have to take into account time-value of money)? A) $10M B) $20M C) $30M D) $40M E) $50M The following information refers to questions 18 through 20. Holt Inc. is planning a subsidiary in Sweden. The initial investment required is $5,000,000. Holt would terminate the project after four years. Holt?s cost of capital is 12%, and the project is of the same required rate of return is 13%. All cash flows generated from the project will be received by Holt at the end of each year. Estimated cash flows the Swedish subsidiary will generate over the project?s lifetime in Swedish Krona (SEK): Year 1 Year 2 Year 3 Year 4 SEK5,000,000 SEK7,500,000 SEK8,500,000 SEK10,000,000 Current spot rate of the Swedish krona is $.27. Holt? exchange rate forecast for the Swedish krona over the project?s lifetime is: Year 1 Year 2 Year 3 Year 4 $.26 $.28 $.24 $.30 18. (2 points) What is the net present value of the Swedish project? A) ?$803,848. B) $5,803,848. C) $1,048,829. D) none of these. 19. (2 points) Assume that SEK4,000,000 of the cash flow in year 4 represents the salvage value. Holt is not completely certain that the salvage value will be this amount and wishes to determine the break-even salvage value, which is $_______. A) $510,088.04 B) $1,710,088 C) $1,040,000 D) none of these 20. (2 points) There is also uncertainty regarding the cost of capital. Recently, Sweden has experienced a financial crisis. To account for this, Holt decides the project should have a higher rate of return. What is NPV of this project if the required return is 16%? A) ?$17,602.62. B) $8,000,000. C) $1,048,829. D) $645,147. 21. (2 points) The earnings of Eumex Inc., a private European firm are ?5 million. Publicly traded European firms in the same industry as Eumex, have an average P/E ratio of 18. Eumex will do an IPO in which it would issue 2M (M stands for millions) shares. Assuming Eumex has growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as? A) E3.6M B) E90.0M C) $41.7M D) $18M 22. Consider a MNC that is considering target firms in France, Germany and Italy. The adoption of the Euro as the common currency by these European countries has _______ capital budgeting analysis that the MNC has to perform before making an acquisition. A) simplified B) complicated C) had no effect on D) none of these 23. If an MNC targets a successful foreign company with plans to make the target?s local business operations more efficient, the risk of the acquisition will be relatively _______, and therefore the MNC?s required return from acquiring the target will be relatively _______. A) high; high B) high; low C) low; high D) low; low 24. When assessing a Canadian target, a US MNC need not consider which of the following tax-related factors? A) corporate income tax rates in Canada. B) withholding tax rates in Canada. C) withholding tax rates in the US. D) corporate tax rates in the US. E) All of these must be considered in assessing the Canadian target. 25. Mono Corp. based in the US had purchased the Canadian tool-maker Sigal 5 years ago for $20M. Mono is now considering whether to divest (sell-off) Sigal. Which of the following is not directly considered in the decision by Mono? A) the required rate of return on Sigal. B) the initial $20M cost of acquisition of Sigal. C) forecasted exchange rates of the Canadian dollar relative to the US dollar. D) the possible selling price of Sigal. 26. Country risk analysis is not suited for which of the following? A) to monitor countries where an MNC has subsidiaries. B) to identify countries not suited for business due to excessive risk. C) to revise an MNC?s financing decisions. D) to determine an MNC?s exposure to exchange rate movements. 27. (2 points) Mantel Co., a U.S.-based MNC that is raising capital for a project France: U.S. risk-free rate = 3% French risk-free rate = 6% Risk premium on dollar-denominated debt provided by U.S. creditors = 4% Risk premium on euro-denominated debt provided by French creditors = 7% Beta of project = 1.6 Expected U.S. market return = 8% U.S. corporate tax rate = 33% French corporate tax rate = 42% What is Mantel?s cost of dollar-denominated equity? A) 12%. B) 11%. C) 10%. D) 8%. 28. AQD Corp., a US MNC is considering financing a portion of a Mexican project within Mexico. The best method for AQD to account for the project?s risk is to: A) calculate NPVs based on the weighted average cost of capital. B) adjust the weighted average cost of capital for the difference in risk. C) derive the net present value of the equity investment. D) none of these. 29. If individual economies are more _______ each other, for an MNC the net cash flows from a portfolio of subsidiaries should exhibit _______ variability. A) dependent on; less B) dependent on; more C) independent of; less D) independent of; more 30. Which of the following does not reduce an MNC?s cost of capital? A) exchange rate risk. B) size. C) ability to borrow in international capital markets. D) products sold in multiple countries. 31. The US firm Atlas and the British firm Tenex enter into a currency swap. This requires Atlas and Tenex the exchange of _______ for _______ at periodic intervals. A) stock; one currency B) stock; a portfolio of foreign currencies C) one currency; stock options D) one currency; another currency 32. (2 points) Matrix Inc. issues three-year bonds denominated in 15,000,000 Norwegian Krones at par. The bonds have a coupon rate of 12% paid annually. The krone is expected to appreciate from its current level of $0.35 to $0.37, $0.39, and $0.42 in years 1, 2, and 3, respectively. What is the financing cost of these bonds? A) 12%. B) 17.945%. C) 18.549%. D) 18.697%. E) 18.937% Use your financial calculator. Alternatively plug the different answers into Excel and check with one works. 33. (2 points) The U.S. one year interest rate is 5%, and the German one year interest rate is 4%. The one year forward rate of the euro is $1.17. The spot rate of the euro at the begin?ning of the year is $1.14. By the end of the year, the euro?s spot rate is $1.25. What is the effective financing rate for a U.S. firm with an one year, uncovered German loan? A) 11.39%. B) 9%. C) 14.04%. D) 13.65%. E) 12.5%. 34. (2 points) Assume U.S.-based firm Holt Inc. obtains a one-year loan of 12,000,000 Mexican Pesos (MXP) at a nominal interest rate of 6%. When the loan was made, the spot rate of pesos was $.15. and the spot rate of the pesos at time of repayment (one-year later) is $.175. The dollar amount initially obtained from the loan is $_______, and $_______ is needed to repay the loan. A) 1,800,000; 1,908,000 B) 1,800,000; 2,226,000 C) 12,000,000; 12,720,000 D) 12,000,000; 1,908,000 35. US firm Mata Corp. is willing to send goods to a British importer without a guaranteed payment by the bank that handles the transaction. The bank instead provides a loan to Mata with the exported goods as collateral. This is: A) factoring. B) forfaiting. C) accounts receivable financing. D) a letter of credit. Question 36: Assume the U.S. financing rate is 10 percent and that the financing rate in Germany is 9 percent. An MNC would be indifferent between financing in dollars and financing in euros next year if the euro is expected to _______. A) appreciate by 0.92%. B) depreciate by 0.92%. C) appreciate by 1.00%. D) depreciate by 1.00%. Question 37: Samson Inc. needs ?1,000,000 in 30 days. Samson can earn 6 percent annualized on a German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the U.S. at an annualized interest rate of 5 percent. If Samson uses a money market hedge, how much should it borrow in the U.S.? A) $952,381. B) $995,851. C) $943,396. D) $995,025. Question 38: FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.70, what is the net amount paid, assuming FAB wishes to minimize its cost? A) 142,000 B) 144,000 C) 146,000 D) 150,000 Question 39. The British Pound is equal to $1.88 and the Brazilian Real is equal to $0.25. The value of the British Pound in Brazilian Real is: A) about 7.52 Brazilian Reals. B) about 4 Brazilian Reals. C) about 0.25 Brazilian Reals. D) about Brazilian Reals. Question 40. A share of the ADR of a French firm represents one share of that firm?s stock that is traded on the Paris stock exchange. The share price of the firm was 28 euros when the French market closed. As the U.S. market opens, the euro is worth $1.40. Thus, the price of the ADR should be: A) $28.00 B) $20.80 C) $39.20. D) $56.00 Question 41. Assume the following information for Pexi Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany: U.S. risk-free rate = 4% German risk-free rate = 5% Risk premium on dollar-denominated debt provided by U.S. creditors = 3% Risk premium on euro-denominated debt provided by German creditors = 4% Beta of project = 1.2 Expected U.S. market return = 10% U.S. corporate tax rate = 30% German corporate tax rate = 40% What is Pexi?s cost of dollar-denominated debt? A) 7.0%. B) 8.0%. C) 6.3%. D) 4.9%. Question 42. An MNC is considering establishing a two year project in New Zealand with a $30 million initial investment. The firm?s cost of capital is 12%. The required rate of return on this project is 18%. The project is expected to generate cash flows of NZ$12 million in Year 1 and NZ$30 million in Year 2, excluding the salvage value. Assume no taxes, and a stable exchange rate of $.60 per NZ$ over the next two years. All cash flows are remitted to the parent. What is the break-even salvage value? A) about NZ$11 million. B) about NZ$15 million. C) about NZ$31 million. D) about NZ$37 million. E) about NZ$25 million. Question 43. The earnings of a private European firm are ?5 million, and the average P/E ratio of publicly traded European firms in the same industry is 12. This firm is considering the possibility of going public in which it would issue one million shares. If the private firm has similar growth potential and other characteristics similar to other publicly traded firms in the industry, its value can be estimated as _______ million euros. A) 2.4 B) 60.0 C) 41.7 D) 12 The following information refers to questions 44 through 45. Assume that Baps Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $5,000,000. If the project is undertaken, Baps would terminate the project after four years. Baps? cost of capital is 13%, and the project is of the same risk as Baps? existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project?s lifetime in Norwegian kroner (NOK): Year 1 Year 2 Year 3 Year 4 NOK10,000,000 NOK15,000,000 NOK17,000,000 NOK20,000,000 The current exchange rate of the Norwegian kroner is $.135. Baps? exchange rate forecast for the Norwegian kroner over the project?s lifetime is listed below: Year 1 Year 2 Year 3 Year 4 $.13 $.14 $.12 $.15 Question 44. What is the net present value of the Norwegian project? A) ?$803,848. B) $5,803,848. C) $1,048,829. D) none of these. Question 45. Baps is also uncertain regarding the cost of capital. Recently, Norway has been involved in some political turmoil. What is the net present value (NPV) of this project if a 16% cost of capital is used instead of 13%? ?$17,602.62. $8,000,000. $1,048,829. $645,147. Question 46: Assume that Jones Co. will need to purchase 100,000 Singapore dollars (S$) in 180 days. Today?s spot rate of the S$ is $.50, and the 180 day forward rate is $.53. A call option on S$ exists, with an exercise price of $.52, a premium of $.02, and a 180 day expiration date. A put option on S$ exists, with an exercise price of $.51, a premium of $.02, and a 180 day expiration date. Jones has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability $.48 10% $.53 60% $.55 30% The probability that the forward hedge will result in a higher payment than the options hedge is _______ (include the amount paid for the premium when estimating the U.S. dollars required for the options hedge). A) 0% B) 10% C) 30% D) 40% E) 70% Question 47: Assume the following information: You have $400,000 to invest Current spot rate of Sudanese dinar (SDD) = $.00570 90-day forward rate of the dinar = $.00569 90-day interest rate in the U.S. = 4.0% 90-day interest rate in Sudan = 4.2% If you conduct covered interest arbitrage, what amount will you have after 90 days? A) $416,000.00. B) $416,800.00. C) $424,242.86. D) $416,068.77. E) None of these. The following information refers to questions 48 through 49. Klimewsky, Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Klimewsky would like you to value this target and has provided you with the following information: Klimewsky expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid. Klimewsky expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 9% over the following two years. Cost of goods sold are expected to be 60% of revenues. Selling and administrative expenses are expected to be MYR40 million in each of the next three years. The Malaysian tax rate on the target's earnings is expected to be 30%. Depreciation expenses are expected to be MYR15 million per year for each of the next three years. The target will need MYR9 million in cash each year to support existing operations. The target's current stock price is MYR35 per share. The target has 11 million shares outstanding. Any cash flows remaining after taxes are remitted by the target to Klimewsky, Inc. Klimewsky uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $.23. Klimewsky's required rate of return on similar projects is 13%. Question 48: The Malaysian target?s value based on its stock price is $_______ million. A) 1.4 B) 1,673.9 C) 111.5 D) 88.6 E) none of these Question 49: The target?s board has indicated that it finds a premium of 30 percent appropriate. You have been asked to negotiate for Klimewsky with the Malaysian target. What is the maximum percentage premium you should be willing to offer? A) 30.0%. B) 25.9%. C) You should not offer any premium because the market?s valuation is below Klimewsky?s valuation. D) none of these. Question 50: A foreign project generates a negative cash flow in year 1 and positive cash flows in years 2 through 5. The NPV for this project will be higher if the foreign currency _______ in year 1 and _______ in years 2 though 5. depreciates; depreciates appreciates; appreciates depreciates; appreciates appreciates; depreciates

Paper#2464 | Written in 18-Jul-2015

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