Multinational Finance

QUANTITATIVE PROBLEMS

1012.1) A Dutch firm sells merchandise today to a British company for £500,000. The current exchange rate is €1.450/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to €1.375/£ the Dutch firm will realize a (gain or loss) of €________.

1012.1) _______ , _______

1012.2) Stimpson Company based in Mammoth Falls, South Dakota has a 6-month C$100,000 contract to complete work in Vancouver, Canada. The current spot rate is $1.02/C$ and the 6-month forward rate is $1.03/C$. Under conditions of equilibrium, management would use today ________ when preparing operating budgets.

1012.2) _______

For questions 1012.3 through 1012.5 use the following information:

DBC Company Inc., imports equipment from LPD Company located in Germany. With the steady decline of the Canadian dollar against the Euro DBC is finding a continued relationship with LPD to be increasingly difficult. In response to DBC’s request, LPD has proposed the following risk-sharing arrangement. First, set the current spot rate of C$1.30/€ as the base rate. As long as spot rates stay within 2.5% (up or down) DBC will pay at the base rate. Any rate outside of the 2.5% range, LPD will share equally with DBC the difference between the spot rate and the base rate. The agreement is for the next year.

1012.3) What are the upper and lower limits for trading at the base rate?
1012.3) ______, ______

1012.4) At the next payment in 2 months, what effective exchange rate is paid if the spot rate is C$1.32/€?
1012.4) ______

1012.5) At the next payment in 4 months, what effective exchange rate is paid if the spot rate is C$1.38/€?
1012.5) ______

For questions 1314.1 through 1314.3 use the following information:

KanjiCan Inc., a Japanese firm, has just borrowed €1,000,000 to make improvements to a French grape plantation and processing plant. The interest rate is 6.50% per year and the Euro Yen rate goes from 100¥/€ at the time the loan was made to 95¥/€ at the end of the first year.

1314.1) How much interest will KanjiCan pay at the end of the first year (rounded and in euros)?

1314.1) _______

1314.2) How much interest and principle will KanjiCan pay at the end of the first year if they repay the entire loan plus interest (rounded and in yen)?

1314.2) _______

1314.3) What is the before tax cost of capital if KanjiCan repays the entire loan plus interest (rounded to two decimals)?

1314.3) _______

NOTES.1) In September 2017 a U.S. investor chooses to invest $500,000 in Italian equity securities at a then current spot rate of $1.25/euro. At the end of one year the spot rate is $1.33/euro. At an average price of €50/share, how many shares of stock will the investor be able to purchase?

NOTES.1) _______

NOTES.2) In September 2017 a U.S. investor chooses to invest $500,000 in Italian equity securities at a then current spot rate of $1.25/euro. At the end of one year the spot rate is $1.33/euro. After purchasing shares at an average price of €50/share and selling at the end of the year his stock at an average price per share of €45. What is the investor’s average rate of return after converting the stock back into dollars?

NOTES.2) _______

NOTES.3) A U.S. investor is considering a portfolio consisting of 40% invested in the U.S. equity index fund and 60% invested in a global equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the global fund, standard deviations of 20% for the U.S. and 18% for the global fund, and a correlation coefficient of 0.65 between the U.S. and the global equity funds. What is the expected return of the proposed portfolio?

NOTES.3) _______

NOTES.4) A U.S. investor is considering a portfolio consisting of 40% invested in the U.S. equity index fund and 60% invested in a global equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the global fund, standard deviations of 20% for the U.S. and 18% for the global fund, and a correlation coefficient of 0.65 between the U.S. and the global equity funds. What is the standard deviation of the proposed portfolio?

NOTES.4) _______

18.1) The current spot rate is 8.05 Norwegian kroner per U.S. dollar and expected inflation rates are 1% in Norway and 3% per annum in the U.S. What is the one-year forward (estimated spot) rate of kroner per dollar using the formula for relative purchasing power parity?
18.1) _______

18.2) The ninety-day forward (estimated spot) is 1.335 U.S. dollars to the euro. Expected inflation rates are 4% in Europe and 1% per annum in the U.S. What is the current spot rate of U.S. dollars per euro using the formula for relative purchasing power parity?
18.2) _______

Bingo Inc., a European company, is considering an expansion of their product line to Japan. The after-tax cash flows for the project are an outflow of 300 million yen at the inception of the project and inflows of 75 million yen in the next four periods with an inflow of 125 million yen in the fifth and final period. The firm’s required rate of return is 12% and they are in the 40% tax bracket. The current spot rate is ¥110/€, and the expected inflation rate in Japan is 4% per year and 3% per year in Europe.

18.3) In yen, what is the NPV of the Bingo expansion?

18.4) In euros, what is the NPV of the Bingo expansion?

 

BONUS (EXTRA) CREDIT PROBLEMS
For questions 18.5 through 18.7 use the following information:

The market value of equity for firm L is $250,000. Firm L has significant operations in England, in Europe, and in Japan and as a result has debts from each of those countries in the amount of £10,000, €20,000, and ¥10,000,000. In addition, firm L owes $80,000 to U.S. bondholders. The cost of equity for firm L is 13.0%. The aggregate cost of debt for firm L is 7.6% before taxes. The marginal tax rate for firm L is 40%. Current spot rates are $1.50/£, $1.30/€, and ¥95/$.

18.5) In dollars, given current spot rates, how much debt does firm L have?

18.5) _______

18.6) In dollars, given current spot rates, what is the total market value of firm L?

18.6) _______

18.7) To two decimals, what is the weighted average cost of capital (WACC) for firm L?