Exam 18: International Capital Budgeting

What is the euro-denominated IRR of this project?

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10% The project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is €2.00 = £1.00 Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the NPV in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S₁(€|£)= €2.20 per £.

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10% The project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is €2.00 = £1.00 Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the ex post IRR in euro for the French firm if they undertake the project today and then the exchange rate rises to S₁(€|£)= €2.20 per £.

In the APV model

Consider the following international investment opportunity: The current exchange rate is $1.60 = €1.00. The inflation rate in the U.S. is 3 percent and in the euro zone 2 percent. The appropriate cost of capital to a U.S.-based firm for a domestic project of this risk is 8 percent. -Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.

An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i_€ = 5%. The bond costs €1,000 today and will return €1,050 at the end of one year without risk. The current exchange rate is €1.00 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate rises to S1($|€)= $1.80 per €.

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

What is the dollar-denominated IRR of this project?

Which of the following statements is false about "borrowing capacity"?

Assume that the firm will partially finance the project with a subsidized $3,000,000 interest only 30-year loan at 8.0 percent APR with annual payments.Note that eight percent is less than the 10 percent that they normally borrow at.What is the NPV of the loan?

The hedge fund manager notices the optionality in starting this project today.He asks you to comment and outline your valuation strategy.

Using your results to the last question,make a recommendation vis-à-vis when to buy the bond.

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10% The project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is €2.00 = £1.00 Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the IRR in euro for the French firm if they wait one year to undertake the project after the exchange rate falls to S₁(€|£)= €1.80 per £.

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next three years in the U.S.is 2% and 3% in the euro zone.What spot exchange rate should prevail three years from now?

What is the euro-denominated IRR?

What is the euro-denominated IRR of this project?

A French firm is considering a one-year investment in the United Kingdom with a pound-denominated rate of return of i_£ = 15%. The firm's local cost of capital is i_€ = 10% The project costs £1,000 and will return £1,150 at the end of one year. The current exchange rate is €2.00 = £1.00 Suppose that the bank of England is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the IRR in euro for the French firm if they wait one year to undertake the project after the exchange rate rises to S₁(€|£)= €2.20 per £.

What is the levered after-tax incremental cash flow for year 30?

What is the levered after-tax incremental cash flow for year 4?

As of today,the spot exchange rate is €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?