Exam 18: International Capital Budgeting

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 falls to S₁(€|£)= €1.80 per £.

What is the NPV of the U.S.-based project to the Irish firm?

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 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate falls to S₁($|€)= $1.40 per €.

The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $500,000. The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425*(1.06). Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent. Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the latter event, the price of gold would increase to at least $460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000. -Compute the NPV at the two possible prices of gold.

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 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the NPV in dollars for the American firm if they wait one year to buy the bond after the exchange rate rises to S₁($|€)= $1.80 per €.Assume that i€ doesn't change.

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. -What is the dollar-denominated IRR of this project?

Using the flow to equity methodology,what is the value of the equity claim?

The ABC Company,a U.S.-based MNC,plans to establish a subsidiary in Spain to manufacture and sell water pumps.ABC has total assets of $80 million,of which $60 million is equity financed.The remainder is financed with debt.ABC considers its current capital structure optimal.The construction cost of the facility in Spain is estimated to be €8,500 million,of which €6,500 million is to be financed at a below-market rate of interest arranged by the Spanish government.The proposed project will increase the borrowing capacity by

What proportion of the firm is financed by debt for a firm that expects a 15% return on equity,a 12% return on assets,and a 10% return on debt? The tax rate is 25%.

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10%; inflation over the next three years is 3% per year in the U.S.and 2% per year in Japan.Calculate the dollar NPV of this project. I did not round my intermediate steps,if you did,select the answer closest to yours.

What is CF0 in dollars?

Using the APV method,what is the value of the debt side effects?

What is the dollar-denominated IRR?

Find the dollar cash flows to compute the dollar-denominated NPV of this project. Please note that your answer is worth ZERO POINTS if it does not contain currency symbols.

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 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the IRR in dollars for the American firm if they wait one year to buy the bond after the exchange rate rises to S₁($|€)= $1.80 per €.Assume that i_€ doesn't change.

The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $500,000. The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425*(1.06). Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent. Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the latter event, the price of gold would increase to at least $460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000. -Compute the NPV at the current price of gold.Hint: think of the gold mine as a perpetuity.

Sensitivity analysis in the calculation of the adjusted present value (APV)allows the financial manager to

What is the NPV of the project using the WACC methodology?

The "net present value" of a capital project is calculated by using:

The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year. The expansion, including the cost of the land, will cost $500,000. The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425*(1.06). Extraction costs are $375 per ounce. The firm's cost of capital is 10 percent. Strik-it-Rich's management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the latter event, the price of gold would increase to at least $460 per ounce. The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000. -Estimate the value of the option on the land to the management of the mine.