Fundamentals of Corporate Finance, Student Value Edition (3rd Edition) - Standalone book
3rd Edition
ISBN: 9780133507911
Author: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Publisher: PEARSON
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Chapter 23, Problem 5DC
Note that the
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Consider this case: Sebrele Enterprises Inc. is a U.S. firm evaluating a project in Australia. You have the following information about the project:
The project requires an investment of AU$915,000 today and is expected to generate cash flows of AU$900,000 at the end of each of the next two years.
The current exchange rate of the U.S. dollar against the Australian dollar is $0.7823 per Australian dollar (AUS).
The one-year forward exchange rate is $0.8102 / AU$, and the two-year forward exchange rate is $0.8412 / AU$.
The firm's weighted average cost of capital (WACC) is 9.5%, and the project is of average risk.
What is the dollar-denominated net present value (NPV) of this project?
$610,602
$726,908
$581,526
$639,679
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent.
Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month.
After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound.
These pounds are equivalent to $
, which represents a profit of $
over the initial $200,000 that California Co. used from their own funds.
Suppose a 1-year UK T-bill pays 2.14% and a 1-year Canadian T-bill pays 1.32%. The current spot exchange rate is 1 British pound (GBP) = 1.7244 Canadian dollar (CAD) and the 1-year forward exchange rate is 1 GBP = 1.6837 CAD. What arbitrage profit can an investor earn on an investment value of CAD 1 milion?
Chapter 23 Solutions
Fundamentals of Corporate Finance, Student Value Edition (3rd Edition) - Standalone book
Ch. 23 - Prob. 1CCCh. 23 - Prob. 2CCCh. 23 - Prob. 3CCCh. 23 - Prob. 4CCCh. 23 - Prob. 5CCCh. 23 - Prob. 6CCCh. 23 - Prob. 7CCCh. 23 - Prob. 8CCCh. 23 - Prob. 9CCCh. 23 - Prob. 10CC
Ch. 23 - Prob. 11CCCh. 23 - Prob. 12CCCh. 23 - Prob. 13CCCh. 23 - Prob. 14CCCh. 23 - Prob. 1CTCh. 23 - Prob. 2CTCh. 23 - Prob. 3CTCh. 23 - Prob. 4CTCh. 23 - Prob. 5CTCh. 23 - Prob. 6CTCh. 23 - Prob. 7CTCh. 23 - Prob. 8CTCh. 23 - Prob. 1DCCh. 23 - Prob. 2DCCh. 23 - Prob. 3DCCh. 23 - Prob. 4DCCh. 23 - Note that the free cash flows you calculated in...Ch. 23 - Prob. 6DCCh. 23 - Prob. 1PCh. 23 - Prob. 2PCh. 23 - Your start-up company has negotiated a contract to...Ch. 23 - You are a broker for frozen seafood products for...Ch. 23 - Prob. 5PCh. 23 - Prob. 6PCh. 23 - Prob. 7PCh. 23 - Prob. 8PCh. 23 - 9. You work for a U.S. firm, and your boss has...Ch. 23 - Prob. 10PCh. 23 - Prob. 11PCh. 23 - Prob. 12PCh. 23 - Prob. 13PCh. 23 - Prob. 14PCh. 23 - Prob. 15PCh. 23 - *16. Suppose the interest on Russian government...Ch. 23 - Prob. 17P
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- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardIn a particular year, the spot exchange rate between the Canadian dollar and U.S. dollar was $0.7554 (per Canadian collar). Interest rates in the U.S. and Canada were 1.5 percent and 1.25 percent per annum, respectively, with continuous compounding. The three-month forward exchange rate was $0.7675, which creates an arbitrage opportunity. Propose one possible strategy to take advantage of this situation and show your possible profit.arrow_forwardAssume that the current (indirect for the UK) spot exchange rate of one pound to the dollar is $1.60/£ and that the corresponding three-month forward exchange rate is $1.59/£. Also, assume that the annualised 3-month interest rate on the pound is currently 4.00% and that the corresponding interest rate on the US dollar is 2.50%. Required:(i) Given the information above, will you invest in the pound or borrow the pound? Explain why. (ii) Calculate the amount of profit that you will realise on each pound that you borrow or invest.arrow_forward
- ‘A Canadian corporation with a French subsidiary generates cash flows of € 10 million a year. It wants to use a currency swap to lock in the rate at which it converts to Canadian dollars. The current exchange rate is C$0.825/€. The fixed rate on a currency swap in euros is 4 percent, and the fixed rate on a currency swap in Canadian dollars is 5 percent. A, Determine the notional principals in euros and Canadian dollars for a swap with annual payments that will achieve the corporation's objective. 8, Determine the overall periodic cash flow from the subsidiary operations and the swap.arrow_forwardToday, a U.S. dollar can be exchanged for 3 New Zealand dollars or for 1.6 Canadian dollars. The one- year CD (deposit) rate is 7 percent in New Zealand, is 6 percent in the United States, and is 5 percentin Canada. Interest rate parity exists between the United States and New Zealand and between theUnited States and Canada. The international Fisher effect exists between the United States and NewZealand. You expect that the Canadian dollar will be worth $.61 at the end of one year. Karen (based inthe United States) invests in a one-year CD in New Zealand and sells New Zealand dollars one yearforward to cover her position. Marcia (who lives in New Zealand) invests in a one-year CD in theUnited States and sells U.S. dollars one year forward to cover her position. William (who lives inCanada) invests in a one-year CD in the United States and does not cover his position. James (basedin the United States) invests in a one-year CD in New Zealand and does not cover his position. Basedon this…arrow_forwardLast year, the exchange rate between the Korean won and the US dollar was KWN 1020 = USB 1. This year, the exchange rate is KWN 1150 =USB 1 . Has the Korean won appreciated or depreciated over the past year? Explain.arrow_forward
- Suppose the current exchange rate between the US dollar (USD) and the euro (EUR) is 1 USD = 0.85 EUR. Additionally, assume that the expected rate of return on US assets is 8% and the purchasing price of a US asset is $ 100. Calculate the expected rate of return on this US asset in terms of euros. [5] How does the ability of international investors to quickly and easily switch between domestic and foreign assets impact the relationship between exchange rates and asset prices, particularly in terms of expected rates of return?arrow_forwardIf the Australian/US dollar exchange rate is 0.72 USD/AUD, US interest rates are 0.25% and Australian interest rates are 0.75% (both for 1 year), what should the 1-year forward USD/AUD exchange rate be?arrow_forward
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