Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN: 9781337395250

Author: Eugene F. Brigham, Joel F. Houston

Publisher: Cengage Learning

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in t…

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Chapter 19, Problem 17P

FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrine’s financial planners are considering undertaking a 1-year project in the United States. The project’s expected dollar-denominated cash flows consist of an initial investment of 52,000 and a cash inflow the following year of $2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy 0.96 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 3%, while similar securities in Switzerland are yielding 1.50%.

a. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?
b. What is the expected forward exchange rate 1 year from now?
c. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine?

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Chapter 19 Solutions

Fundamentals of Financial Management (MindTap Course List)

Ch. 19 - Why do U.S. corporations build manufacturing...Ch. 19 - Prob. 2Q Ch. 19 - Prob. 3Q Ch. 19 - Should firms require higher rates of return on...Ch. 19 - Does interest rate parity imply that interest...Ch. 19 - Prob. 6Q Ch. 19 - Prob. 7Q Ch. 19 - Prob. 1P Ch. 19 - Prob. 2P Ch. 19 - INTEREST RATE PARITY Six-month T-bills have a...

Ch. 19 - Prob. 4P Ch. 19 - Prob. 5P Ch. 19 - Prob. 6P Ch. 19 - CURRENCY APPRECIATION Suppose that 1 Danish krone...Ch. 19 - Prob. 8P Ch. 19 - Prob. 9P Ch. 19 - INTEREST RATE PARITY Assume that interest rate...Ch. 19 - PURCHASING POWER PARITY In the spot market, 17.6...Ch. 19 - INTEREST RATE PARITY Assume that interest rate...Ch. 19 - SPOT AND FORWARD RATES Arvin Australian Imports...Ch. 19 - EXCHANGE GAINS AND LOSSES You are the vice...Ch. 19 - Prob. 15P Ch. 19 - Prob. 16P Ch. 19 - FOREIGN CAPITAL BUDGETING Sandrine Machinery is a...Ch. 19 - Prob. 18SP Ch. 19 - Prob. 19IC

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FOREIGN CAPITAL BUDGETING Sandrine Machinery is a Swiss multinational manufacturing company. Currently, Sandrines financial planners are considering undertaking a 1-year project in the United States. The projects expected dollar- denominated cash flows consist of an initial investment of 2,000 and a cash inflow the following year of 2,400. Sandrine estimates that its risk-adjusted cost of capital is 10%. Currently, 1 U.S. dollar will buy 0.94 Swiss franc. In addition, 1-year risk-free securities in the United States are yielding 3%, while similar securities in Switzerland are yielding 1.50%. a. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? b. What is the expected forward exchange rate 1 year from now? c. If Sandrine undertakes the project, what is the net present value and rate of return of the project for Sandrine?

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