International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Kristo Asafo Tools Ltd is filling an order from a Korean industrial company for machinery worth 160,000,000 Won. The export sale is denominated in Korean Won and is on a one-year open account basis. The opportunity cost of funds for Kristo Asafo Tools Ltd is 8%
The Current spot rate between Won and Dollars is 800 Won/$. The forward Won sells at a discount of 12% per annum, but the finance staff of Kristo Asafo Tools Believes that the Won will drop only 9% in value over the next year. Kristo Asafo Tools Ltd faces the following choices
This question compares the cost of a money market hedge with a forward hedge, and considers both alternatives against the possibility of remaining unhedged.
a) Wait one year to receive the won amount and exchange Won for dollars at that time
b) Sell the Won proceeds of the sale forward today
c) Borrow Won from a Seoul bond at 20% per annum against the expected future receipt of the Korean importer’s payment
d) What do you recommend and why?
Davao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Assume that all of Davao’s costs would be at the same levels and rates as last year. What net income after taxes would Davao make if it took this order and rejected some business from regular customers so as not to exceed capacity?
Answer: 221,500
Without prejudice to your answers to previous questions, and assume that Davao plans to market its product in a new territory. Davao estimates that an advertising and promotion program costing P61,500 annually would need to be undertaken for the next two or three years. In addition, a P25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Davao’s current after-tax income of P94,500?
Answer: 307.5
Intelledex, Inc., a robotics manufacturer based in Corvallis, Oregon, has won a bid to deliver robotics equipment to a Swiss automobile company. The bid is SF8 million. Intelledex will receive the entire SF8 million upon delivery of the equipment six months from now. The present spot rate for the Swiss franc is SF8.000/$, and the six-month forward rate is SF8.2000/$. Intelledex can borrow U.S. dollars at 12% per annum or Swiss francs at 17% per annum. Its opportunity cost of capital is 14% per annum.
1. Explain the various ways in which Intelledex could cover its foreign exchangeexposure. 2. What would the bread-even opportunity cost of capital have to be for them to beindifferent between the various alternatives?3. Explain how economic exposure might change the expected profitability of this order.
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- Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today’s spot rate. The firm’s financial manager, James Desreumaux, has noted the following current spot and forward rates: On the same day, Desreumaux agrees to purchase 15,000 more watches in 3 months at the same price of 1 million Swiss francs. What is the cost of the watches in U.S. dollars, if purchased at today’s spot rate? What is the cost in dollars of the second 15,000 batch if payment is made in 90 days and the spot rate at that time equals today’s 90-day forward rate? If the exchange rate for is 0.50 Swiss francs per dollar in 90 days, how much will Desreumaux have to pay (in dollars) for the watches?arrow_forwardAshGold Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows:Present spot rate:C$ 1.4000/US$Six-month forward rate:C$ 1.4200/US$Canadian six-month interest rate:13% per annumU.S. six-month interest rate10% per annumThe financial manager’s own analysis suggests that in six months the following spot rates can be expected:Highest expected rate:C$1.4000/US$Most likely rate:C$1.4300/US$Lowest expected rate:C$1.4500/US$Ashgold Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Ashgold’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or disadvantages of each?arrow_forwardAshGold Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows:Present spot rate:C$ 1.4000/US$Six-month forward rate:C$ 1.4200/US$Canadian six-month interest rate:13% per annumU.S. six-month interest rate10% per annumThe financial manager’s own analysis suggests that in six months the following spot rates can be expected:Highest expected rate:C$1.4000/US$Most likely rate:C$1.4300/US$Lowest expected rate:C$1.4500/US$Ashgold Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Ashgold’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or disadvantages of each? (2) A key issue facing financial executives of multinational firms is exposure to exchange rate changes.a. Define…arrow_forward
- Hithergreen Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows: Present spot rate: C$ 1.4000/US$ Six-month forward rate: C$ 1.4200/US$ Canadian six-month interest rate: 13% per annum U.S. six-month interest rate 10% per annum The financial manager’s own analysis suggests that in six months the following spot rates can be expected: Highest expected rate: C$1.4000/US$ Most likely rate: C$1.4300/US$ Lowest expected rate: C$1.4500/US$ Hithergreen Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Hithergreen’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or…arrow_forwardDavao has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Assume that all of Davao’s costs would be at the same levels and rates as last year. What net income after taxes would Davao make if it took this order and rejected some business from regular customers so as not to exceed capacity? Without prejudice to your answers to previous questions, and assume that Davao plans to market its product in a new territory. Davao estimates that an advertising and promotion program costing P61,500 annually would need to be undertaken for the next two or three years. In addition, a P25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Davao’s current after-tax income of P94,500? If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs stay at the same levels and amounts next year, the…arrow_forwardDell is evaluating the proposal of a new factory in an overseas country (Germany). The currency in the overseas country is Euro. Dell will be renting a premise of 50,000 Square feet for this facility. Annually the factory expects to sell 20,000 units of Keyboard at 3 euro per keyboard. Total capital cost is 20,000 euro and is depreciated using the straight-line method over five years to a zero-salvage value. The monthly salary expense will be 3000 euro, whereas annual utility and other expense will be 2,000 euro. The annual total rent is 5,000 euro. Variable costs are 10 per cent of annual sales revenue. Assume; initially, Dell will require 4,000 euro in working capital for this project. However, after the project, Dell will not receive anything from the working capital. Besides, there are no additional cash inflows and outflows from this project. The project does not have any tax implication. Calculate cash flows from the asset (CFFA) for this project.arrow_forward
- a. Davao had a potential foreign customer that has offered to buy 1,500 tons at 450 per ton. Assume that all of Davao's costs would bet at the same levels and rates as last year. What net incomr after taxes would Davao make if it took this order and rejected some business from regular customers so as not to exceed capacity? b. Without prejudice to your answers to peevious questions, and assume that Davao plans to market its product in a new territory. Davao estimated that an advertising and promotion program costing 61,500 annually would need to be undertaken for the next two or three years. In addition l, a 25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Davao's current after-tax income of 94,500.arrow_forwardStatoil sold 1 million barrels of crude oil to the Norwegian petrol station chain, Circle K, todayfor 120 Nok per barrel (Nok denotes the Norwegian Krone). Statoil expects to receive the full payments from Circle K in 3 months’ time when the crude oil is delivered to Circle K’s facilities in Norway. Statoil is informed that Circle K will pay for the oil in Norwegian Krone. Ari is asked by the Chief Financial Officer (CFO) about the strategy to reduce the uncertainty around the expected payment from Circle K. Ari is faced with the following market rates:Spot exchange Rate Nok 6.0312/$3-month forward rate Nok 6.0186/$U.S. dollar 3-month interest rate 5%Norwegian Krone 3-month interest rate 4.45%Based on the above information, what hedging strategy should Ari advise the CFO that works the best for Statoil? Explain why Ari should choose such hedging strategy. How much U.S. dollar will Statoil receive at the end of 3 months by using this hedging strategy?arrow_forward
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