Orange: Financial Management - Chapter 21 International Corporate Finance (Continue)

50.

Which one of the following types of operations would be subject to the most political risk if the operation were conducted outside of a firm's home country?

A.	accounting and payroll functions

B.	partial assembly of components manufactured in the firm's home country

C.	military weapons manufacturing

D.	packing materials manufacturing for use by the home country firm

E.	production of minor parts, such as nuts and bolts, for use by the home country firm

Refer to section 21.7

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 21-04 The impact of political risk on international business investing.
Section: 21.7
Topic: Political risk

51.

How many Euros can you get for $2,200 if one euro is worth $1.2762?

€1,638.09

€1,723.87

€2,676.67

€2,680.02

€2,684.15

$2,200 (€1/$1.2762) = €1,723.87

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 21-01 How exchange rates are quoted; what they mean; and the difference between spot and forward exchange rates.
Section: 21.2
Topic: Currency conversion

52.

You are planning a trip to Australia. Your hotel will cost you A$145 per night for seven nights. You expect to spend another A$2,800 for meals, tours, souvenirs, and so forth. How much will this trip cost you in U.S. dollars given the following exchange rates?

$2,559

$2,604

$2,631

$5,452

$5,688

[(A$145 × 7) + A$2,800] × ($1/A$1.4910) = $2,559

53.

You want to import $147,000 worth of rugs from India. How many rupees will you need to pay for this purchase if one rupee is worth $0.0203?

A.	Rs 6,887,424

B.	Rs 7,238,911

C.	Rs 7,241,379

D.	Rs 8,367,594

E.	Rs 8,415,096

$147,000 × (Rs 1/$0.0203) = Rs 7,241,379

54.

Currently, $1 will buy C$1.2103 while $1.2762 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

A.	C$1 = €0.6474

B.	C$1 = €0.6539

C.	C$1 = €1.2762

D.	C$1.5446 = €1

E.	C$1.5528 = €1

(C$1.2103/$1) ($1.2762/€1) = C$1.5446/€1

55.

Assume that ¥95.42 equal $1. Also assume that SKr7.7274 equal $1. How many Japanese yen can you acquire in exchange for 3,000 Swedish krone?

¥235

¥261

¥37,045

¥39,024

¥39,520

SKr3,000 ($1/SKr7.7274) (¥95.42/$1) = ¥37,045

56.

You just returned from some extensive traveling throughout the Americas. You started your trip with $20,000 in your pocket. You spent 3.4 million pesos while in Chile and 16,500 bolivares in Venezuela. Then on the way home, you spent 47,500 pesos in Mexico. How many dollars did you have left by the time you returned to the U.S. given the following exchange rates? (Note: Multiple symbols are used to designate various currencies. For example, the U.S. dollar is notated as "$" or as "USD".)

1,113 USD

3,535 USD

4,117 USD

4,244 USD

7,408 USD

20,000USD - [3.4mCLP (1USD/668.0001CLP)] - [16,500 VEF (1USD/2.1473VEF)] - [47,500MXN × (0.0777USD/1MXN) = 3,535USD

57.

You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds. What will be your profit or loss if you accept your friend's offer, given the following exchange rates?

A.	£10.20 loss

B.	£13.29 loss

C.	£28.51 loss

D.	£10.20 profit

E.	£28.51 profit

[£100 × (C$180/£100) ($1/C$1.245) (£1/$1.6100)] - £100 = -£10.20 = £10.20 loss

58.

Assume you can buy 52 British pounds with 100 Canadian dollars. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?

$0.78

$1.04

$1.33

$1.56

$1.64

[$100 × (C$1.2103/$1) (£52/C$100) ($1/£0.6211)] - $100 = $1.33 profit

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 21-01 How exchange rates are quoted; what they mean; and the difference between spot and forward exchange rates.
Section: 21.2
Topic: Triangle arbitrage

59.

Today, you can exchange $1 for £0.6522. Last week, £1 was worth $1.6104. How much profit or loss would you now have if you had converted £100 into dollars last week?

A.	loss of ₤1.57

B.	loss of ₤0.39

C.	loss of ₤0.07

D.	profit of ₤5.03

E.	profit of ₤5.59

[£100 ($1.6104/£1) (£0.6522/$1)] - £100 = £5.03

60.

Today, you can get either 121 Canadian dollars or 1,288 Mexican pesos for 100 U.S. dollars. Last year, 100 U.S. dollars was worth 115 Canadian dollars or 1,291 Mexican pesos. Which one of the following statements is correct given this information?

A.	$100 converted into Canadian dollars last year would now be worth $105.22.

B.	$100 converted into Mexican pesos last year would now be worth $99.77.

C.	$100 converted into Mexican pesos last year would now be worth $100.36.

D.	$100 converted into Canadian dollars last year would now be worth $95.05.

E.	$100 invested in Canadian dollars last year would now be worth $100.

$100 (C$115/$100) ($100/C$121) = $95.05
$100 (Ps1,291/$100) ($100/Ps1,288) = $100.23

61.

The camera you want to buy costs $230 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists.

$238.77

$242.19

$243.52

$248.60

$278.38

$230 (C$1/$0.8262) = C$278.38

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.3
Topic: Absolute purchasing power parity

62.

A new coat costs 3,900 Russian rubles. How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

€97.23

€112.97

€119.05

€181.27

€183.99

Ru3,900 ($1/Ru27.0520) (€1/$1.2762) = €112.97

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.3
Topic: Absolute purchasing power parity

63.

Assume that $1 can buy you either ¥95.42 or £0.6211. If a TV in London costs £990, what will that identical TV cost in Tokyo if absolute purchasing power parity exists?

¥58,797

¥60,554

¥152,094

¥161,855

¥163,542

£990 ($1/£0.6211) (¥95.42/$1) = ¥152,094

64.

In the spot market, $1 is currently equal to A$1.4910. Assume the expected inflation rate in Australia is 3.5 percent and in the U.S. 4.0 percent. What is the expected exchange rate one year from now if relative purchasing power parity exists?

A$1.4810

A$1.4835

A$1.4875

A$1.4985

A$1.5005

E(S₁) = A$1.4910 [1 + (0.035 - 0.04)]¹ = A$1.4835

65.

In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate in the U.K. is 4.2 percent while it is 3.1 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

£0.6161

£0.6178

£0.6239

£0.6279

£0.6291

E(S₁) = £0.6211 [1 + (0.042 - 0.031]¹ = £0.6279

66.

In the spot market, $1 is currently equal to £0.6211. Assume the expected inflation rate in the U.K. is 2.6 percent while it is 4.3 percent in the U.S. What is the expected exchange rate four years from now if relative purchasing power parity exists?

£0.5799

£0.5822

£0.6105

£0.6623

£0.6644

E(S₄) = £0.6211 × [1 + (0.026 - 0.043)]⁴ = £0.5799

67.

Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925. The nominal risk-free rate in Canada is 3 percent while it is 4 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

$0.005

$0.006

$0.008

$0.015

$0.018

Arbitrage profit = [$1 × (C$1.2103/$1) × 1.03 × ($1/C$1.1925)] - ($1 × 1.04) = $0.005

68.

Assume the current spot rate is C$1.1875 and the one-year forward rate is C$1.1724. The nominal risk-free rate in Canada is 4 percent while it is 3 percent in the U.S. Using covered interest arbitrage you can earn an extra _____ profit over that which you would earn if you invested $1 in the U.S.

$0.018

$0.023

$0.029

$0.031

$0.035

Arbitrage profit = [$1 × (C$1.1875/$1) × 1.04 × ($1/C$1.1724)] - ($1 × 1.03) = $0.023

69.

Assume the spot rate for the Japanese yen currently is ¥99.31 per $1 and the one-year forward rate is ¥97.62 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

A.	1.63 percent

B.	2.11 percent

C.	4.20 percent

D.	4.96 percent

E.	5.01 percent

(¥97.62 - ¥99.31)/¥99.31 = 0.025 - RUS; RUS = 4.20 percent

70.

Assume the spot rate for the British pound currently is £0.6211 per $1. Also assume the one-year forward rate is £0.6347 per $1. A risk-free asset in the U.S. is currently earning 3.4 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

A.	1.18 percent

B.	1.57 percent

C.	3.67 percent

D.	5.66 percent

E.	5.92 percent

(£0.6347/£0.6211) = [(1 + R_FC)/1.034]; R_FC = 5.66 percent

71.

A risk-free asset in the U.S. is currently yielding 4 percent while a Canadian risk-free asset is yielding 2 percent. Assume the current spot rate is C$1.2103. What is the approximate three-year forward rate if interest rate parity holds?

C$1.1391

C$1.1744

C$1.2241

C$1.2295

C$1.2470

F₃ = C$1.2103 × [1 + (0.02 - 0.04)]³ = C$1.1391

72.

Assume the spot rate on the Canadian dollar is C$1.1847. The risk-free nominal rate in the U.S. is 5 percent while it is only 4 percent in Canada. What one-year forward rate will create interest rate parity?

C$1.1362

C$1.1429

C$1.1734

C$1.1799

C$1.1961

F₁/C$1.1847 = 1.04/1.05; F₁ = C$1.1734

73.

Assume the spot rate on the Canadian dollar is C$0.9872. The risk-free nominal rate in the U.S. is 5.4 percent while it is only 4.2 percent in Canada. Which one of the following four-year forward rates best establishes the approximate interest rate parity condition?

C$0.9407

C$0.9608

C$1.0267

C$1.0519

C$1.0597

F₄ = C$0.9872 × [1 + (0.042 - 0.054)]⁴ = C$0.9407

74.

You are considering a project in Poland which has an initial cost of 275,000PLN. The project is expected to return a one-time payment of 390,000PLN four years from now. The risk-free rate of return is 4.5 percent in the U.S. and 3 percent in Poland. The inflation rate is 4 percent in the U.S. and 2 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment of 390,000PLN be worth in U.S. dollars four years from now?

$149,568

$180,560

$987,251

D.	$1,016,926

E.	$1,304,357

E(S₄) = (277PLN/100USD) × [1 + (0.03 - 0.045)]⁴ = 2.607502245PLN
Payment = 390,000PLN ($1/2.607502245PLN) = $149,568

75.

You are expecting a payment of 450,000PLN three years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Poland. The inflation rate is 2.5percent in the U.S. and 3 percent in Poland. Currently, you can buy 277PLN for 100USD. How much will the payment three years from now be worth in U.S. dollars?

$154,751

$157,677

$219,511

D.	$1,317,269

E.	$1,369,888

E(S₃) = (277PLN/100USD) × [1 + (0.04 - 0.03)]³ = 2.85393377PLN
450,000PLN × ($1/2.85393377PLN) = $157,677

76.

You are expecting a payment of C$100,000 four years from now. The risk-free rate of return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 = $0.8273. How much will the payment four years from now be worth in U.S. dollars?

$61,129

$62,414

$66,667

$78,202

$81,745

E(S₄) = (C$1/$0.8273) × [1 + (0.041 - 0.038)]⁴ = C$1.223321779
C$100,000 × ($1/C$1.223321779) = $81,745

77.

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.6869. The expected inflation rate in Norway is 6 percent and in the U.S. it is 3.1 percent. A risk-free asset in the U.S. is yielding 4 percent. What risk-free rate of return should you expect on a Norwegian security?

A.	3.5 percent

B.	4.0 percent

C.	4.5 percent

D.	5.0 percent

E.	6.9 percent

0.04 - 0.031 = R_FC - 0.06; R_FC = 6.9 percent

78.

Suppose the current spot rate for the Norwegian kroner is $1 = NKr6.7119. The expected inflation rate in Norway is 4 percent and in the U.S. 3 percent. A risk-free asset in the U.S. is yielding 4.5 percent. What approximate real rate of return should you expect on a risk-free Norwegian security?

A.	1.0 percent

B.	1.5 percent

C.	2.0 percent

D.	2.5 percent

E.	3.0 percent

Approximate real rate_N = Approximate real rate_U.S. = 0.045 - 0.03 = 1.5 percent

79.

The expected inflation rate in Finland is 2.8 percent while it is 3.2 percent in the U.S. A risk-free asset in the U.S. is yielding 4.9 percent. What approximate real rate of return should you expect on a risk-free Finnish security?

A.	1.2 percent

B.	1.7 percent

C.	2.1 percent

D.	2.5 percent

E.	2.8 percent

Approximate real rate_F = Approximate real rate_U.S = 0.049 - 0.032 = 1.7 percent

80.

You want to invest in a project in Canada. The project has an initial cost of C$2.2 million and is expected to produce cash inflows of C$900,000 a year for 3 years. The project will be worthless after the first 3 years. The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S. The applicable interest rate for the project in Canada is 13 percent. The current spot rate is C$1 = $0.8158. What is the net present value of this project in Canadian dollars?

-C$91,889

-C$87,924

-C$74,963

C$165,139

C$167,528

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 21-03 The different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 21.5
Topic: Foreign currency approach

81.

You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.8million and is expected to produce cash inflows of SKr1.75 million a year for three years. The project will be worthless after three years. The expected inflation rate in Sweden is 3.2 percent while it is 4.3 percent in the U.S. A risk-free security is paying 5.5 percent in the U.S. The current spot rate is $1 = SKr7.7274. What is the net present value of this project in Swedish kroner? Assume the international Fisher effect applies.

A.	SKr587,561

B.	SKr701,458

C.	SKr823,333

D.	SKr958,029

E.	SKr1,019,774

0.055 - 0.043 = R_FC - 0.032; R_FC = 0.044

AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 21-03 The different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 21.5
Topic: Foreign currency approach

82.

You are analyzing a project with an initial cost of £48,000. The project is expected to return £11,000 the first year, £36,000 the second year and £38,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 4 percent while it is 5 percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

$23,611

$25,938

$26,930

$29,639

$30,796

E(S₁) = 0.6211 × [1 + (0.05 - 0.04)]¹ = 0.627311
E(S₂) = 0.6211 × [1 + (0.05 - 0.04)]² = 0.63358411
E(S₃) = 0.6211 × [1 + (0.05 - 0.04)]³ = 0.639919951
CF₀ = -£48,000 × ($1/£0.6211) = -$77,282.24
CF₁ = £11,000 × ($1/£0.627311) = $17,535.16
CF₂ = £36,000 × ($1/£0.63358411) = $56,819.61
CF₃ = £38,000 × ($1/£0.639919951) = $59,382.43
NPV = -$77,282.24 + ($17,535.16/1.12¹) + ($56,819.61/1.12²) + ($59,382.43/1.12³) = -$77,282.24 + $15,656.39 + $45,296.25 + $42,267.24 = $25,938

83.

You are analyzing a project with an initial cost of £130,000. The project is expected to return £20,000 the first year, £50,000 the second year and £90,000 the third and final year. There is no salvage value. The current spot rate is £0.6211. The nominal risk-free return is 5.5 percent in the U.K. and 6 percent in the U.S. The return relevant to the project is 14 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?

-$19,062

-$5,409

$5,505

$9,730

$18,947

E(S₁) = 0.6211 × [1 + (0.055 - 0.06)]¹ = 0.6179945
E(S₂) = 0.6211 × [1 + (0.055 - 0.06)]² = 0.614904528
E(S₃) = 0.6211 × [1 + (0.055 - 0.06)]³ = 0.611830005
CF₀ = -£130,000 × ($1/£0.6211) = -$209,306.07
CF₁ = £20,000 × ($1/£0.6179945) = $32,362.75
CF₂ = £50,000 × ($1/£0.614904528) = $81,313.44
CF₃ = £90,000 × ($1/£0.611830005) = $147,099.68
NPV = -$209,306.07 + ($32,362.75/1.14¹) + ($81,313.44/1.14²) + ($147,099.68/1.14³) = -$209,306.07 + $28,388.38 + $62,568.05 + $99,288.10 = -$19,062

84.

Based on the information below, what is the cross-rate for Australian dollars in terms of Swiss francs?

0.5607

0.7219

0.8897

1.1437

1.2834

Cross-rate = 0.7125/0.8008 = 0.8897

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-2
Learning Objective: 21-01 How exchange rates are quoted; what they mean; and the difference between spot and forward exchange rates.
Section: 21.1
Topic: Cross-rate

85.

Suppose the spot exchange rate for the Canadian dollar is C$1.28 and the six-month forward rate is C$1.33. The U.S. dollar is selling at a _____ relative to the Canadian dollar and the U.S. dollar is expected to _____ relative to the Canadian dollar.

A.	discount; appreciate

B.	discount; depreciate

C.	premium; appreciate

D.	premium; depreciate

E.	premium; remain constant

The U.S. dollar is selling at a premium because it is more expensive in the forward market than in the spot market. The U.S. dollar is expected to appreciate in value relative to the Canadian dollar because the U.S. dollar is worth more Canadian dollars in the future than it is today.

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-4
Learning Objective: 21-01 How exchange rates are quoted; what they mean; and the difference between spot and forward exchange rates.
Section: 21.2
Topic: Forward exchange rates

86.

Based on the following information, the value of the U.S. dollar will _____ with respect to the yen and will _____ with respect to the Canadian dollar.

A.	appreciate; appreciate

B.	appreciate; depreciate

C.	depreciate; appreciate

D.	depreciate; depreciate

E.	depreciate; remain constant

The U.S. dollar will appreciate against the yen because it will take more of that currency to buy one U.S. dollar. The U.S. dollar will depreciate against the Canadian dollar because it will take less of that currency to buy one U.S. dollar in the future as compared to today.

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-3
Learning Objective: 21-01 How exchange rates are quoted; what they mean; and the difference between spot and forward exchange rates.
Section: 21.2
Topic: Forward exchange rates

87.

Suppose the Japanese yen exchange rate is ¥114 = $1, and the United Kingdom pound exchange rate is £1 = $1.83. Also suppose the cross-rate is ¥191 = £1. What is the arbitrage profit per one U.S. dollar?

$0.0743

$0.0846

$0.0857

$0.0923

$0.0948

$1 = ¥114
¥114 (£1/¥191) = £0.596859
£0.596859 ($1.83/£1) = $1.0923
Profit = $1.0923 - $1 = $0.0923

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-5
Learning Objective: 21-01 How exchange rates are quoted; what they mean; and the difference between spot and forward exchange rates.
Section: 21.2
Topic: Arbitrage

88.

Suppose the exchange rates are as follows:

Assume interest rate parity holds and the current six-month risk-free rate in the United States is 3.1 percent. What must the six-month risk-free rate be in Great Britain?

A.	2.36 percent

B.	2.87 percent

C.	2.94 percent

D.	3.10 percent

E.	3.52 percent

R_FC = (£0.5363 - £0.5403)/£0.5403 + 0.31 = 2.36 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-6
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.4
Topic: Interest rate parity

89.

Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5803S$/US$. You have just placed an order for 30,000 motherboards at a cost to you of 170.90 Singapore dollars each. You will pay for the shipment when it arrives in 120 days. You can sell the motherboards for $148 each. What will your profit be if the exchange rate goes up by 8 percent over the next 120 days?

$913,564

B.	$1,008,121

C.	$1,216,407

D.	$1,435,999

E.	$1,502,400

Profit = 30,000 {$148 - [(S$170.90) ($1/(S$1.5803 × 1.08))]} = $1,435,999

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-9
Learning Objective: 21-03 The different types of exchange rate risk and ways firms manage exchange rate risk.
Section: 21.6
Topic: Exchange rate risk

90.

Suppose the spot and six-month forward rates on the Norwegian krone are Kr6.36 and Kr6.56, respectively. The annual risk-free rate in the United States is 4.5 percent, and the annual risk-free rate in Norway is 7 percent. What would the six-month forward rate have to be on the Norwegian krone to prevent arbitrage?

Kr6.4390

Kr6.4872

Kr6.5103

Kr6.5174

Kr6.6067

F₁₈₀ = (Kr6.36)[1 + (0.07 - 0.045)]^1/2 = Kr6.4390

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-10
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.4
Topic: Interest rate parity

91.

You observe that the inflation rate in the United States is 3.5 percent per year and that T-bills currently yield 3.8 percent annually. What do you estimate the inflation rate to be in Australia, if short-term Australian government securities yield 4.5 percent per year?

A.	4.17 percent

B.	4.20 percent

C.	4.24 percent

D.	4.27 percent

E.	4.30 percent

R_US - h_Us = R_FC - h_FC0.038 - 0.035 = 0.045 - h_FC; h_FC = 4.20 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-11
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.4
Topic: International Fisher effect

92.

Suppose the spot and three-month forward rates for the yen are ¥128.79 and ¥135.22, respectively. What is the approximate annual percent difference between the inflation rate in the U.S. and in Japan?

A.	3.93 percent

B.	4.21 percent

C.	16.67 percent

D.	21.52 percent

E.	22.28 percent

h_US - h_JAP ≈ (¥135.22 - ¥128.79)/¥128.79 = 0.049926
Approximate inflation difference = (1 + 0.049926)⁴ - 1 = 21.52 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-12
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.3
Topic: Spot versus forward rates

93.

Assume the spot exchange rate for the Hungarian forint is HUF 215. Also assume the inflation rate in the United States is 4 percent per year while it is 9.5 percent in Hungary. What is the expected exchange rate 5 years from now?

269

276

281

294

299

F₅ = 215[1 + (0.095 - 0.04)]⁵ = 281

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
EOC: 21-13
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.3
Topic: Expected spot rate

94.

Lakonishok Equipment has an investment opportunity in Europe. The project costs €12 million and is expected to produce cash flows of €2.7 million in year 1, €3.1 million in year 2, and €2.8 million in year 3. The current spot exchange rate is $1.3/€. The current risk-free rate in the United States is 5 percent, compared to that in Europe of 3.5 percent. The appropriate discount rate for the project is estimated to be 18 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated €6.5 million. What is the NPV of the project?

A.	-$2,448,215

B.	-$1,920,596

C.	-$1,878,787

$879,402

E.	$2,316,519

E(S₁) = (1.05/1.035)¹ ($1.3/€) = $1.31884058/€
E(S₂) = (1.05/1.035)² ($1.3/€) = $1.337954211/€
E(S₃) = (1.05/1.035)³ ($1.3/€) = $1.357344852/€
Year 0 cash flow = €-12,000,000 ($1.3/€) = -$15,600,000
Year 1 cash flow = €2,700,000 ($1.31884058/€) = $3,560,869.57
Year 2 cash flow = €3,100,000 ($1.337954211/€) = $4,147,658.06
Year 3 cash flow = €2,800,000 + €6,500,000) ($1.357344852/€) = $12,623,307.12
NPV = -$15,600,000 + ($3,560,869.57/1.18) + ($4,147,658.06/1.18²) + ($12,623,307.12/1.18³) = -$1,920,596

AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
EOC: 21-14
Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange rate changes.
Section: 21.5
Topic: Capital budgeting

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Contents

Tuesday, November 1, 2016

Financial Management - Chapter 21 International Corporate Finance (Continue)

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