Ocean Drilling, Inc. Read ?Notes on Transactions and Translation Exposure? for methods of hedging 1. How would you forecast exchange rate movements for analytic purposes in this case? 2. Which of the two bids would you accept and why? Assume the following: ? Tax rate is 50%. ? The loan principal amounts will be repaid in equal annual installments over the lives of the loans. ? No further debt financing would be undertaken in connection with these rigs. ? The rig can be depreciated over five (5) years using a straight-line method. Hint: These bids have subsidized financing. To get the value of financial subsidies, note that CF = [Principal borrowed] ? [(Principal repayment) + (After-tax interest payments)]. You should discount this by Ocean Drilling?s cost of debt. There are other financial side effects, e.g., depreciation tax shields. 3. Do the valuation of financial subsidies in two methods: (1) using forecasted spot exchange rates; and (2) using converted discount rates. 4. Examine money market hedge and forward hedge to hedge the currency risks involved in the financing of the rigs. How costly, in percentage terms, is each alternative,here is the "ocean.drilling. inc"
Paper#6822 | Written in 18-Jul-2015Price : $25