Exam 18: International Capital Budgeting

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 = $1.50.U.S.dollar-denominated government bonds currently have a yield to maturity of 4 percent.Suppose that the European Central Bank is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities: S₁ ($/€)= €1.80 per € S₁ ($/€)= €1.40 per € Following revaluation,the exchange rate is expected to remain steady for at least another year. Find the NPV in euro for the American firm if they wait one year to undertake the project after the exchange rate falls to S₁($/€)= $1.40 per €.Assume that i_€ doesn't change.

What is the expected return on equity for a tax-free firm with a 15 percent expected return on assets that pays 12 percent on its debt,which totals 25 percent of assets?

Consider the following international investment opportunity.It involves a gold mine that can be opened at a cost,then produces a positive cash flow,but then requires environmental clean-up. The current exchange rate is $1.55 = €1.00.The inflation rate in the U.S.is 6 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 is the dollar-denominated NPV of this project.

The spot exchange rate is ¥125 = $1.The U.S.discount rate is 10 percent; inflation over the next three years is 3 percent per year in the U.S.and 2 percent per year in Japan.Calculate the dollar NPV of this project. Year 0 Year 1 Year 2 Year 3 ¥1,000,000 ¥500,000 ¥500,000 ¥500,000 I did not round my intermediate steps,if you did,select the answer closest to yours.

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 is the dollar-denominated NPV of this project.

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States. The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget. The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year. The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S. For simplicity,assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent. What is the NPV of the U.S.-based project to the Irish firm?

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the APV method,what is the value of the debt side effects?

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 3; if the firm were financed entirely with equity,the required return would be 10 percent. Using the weighted average cost of capital methodology,what is the NPV? I didn't round my intermediate steps.If you do,you're not going to get the right answer.

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: S₁ (€/£)= €2.20 per £ S₁ (€/£)= €1.80 per £ 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 £.

i = r_debt = 6% OCF₀ = −$100,000 K_u = r_assets = 12% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34 K_l = r_equity = 27.84% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 8.74% π = Tax rate = 34% Debt-to-equity ratio = 4 Risk-free rate = 2% The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $20,000 cash and borrow $80,000 at 6 percent with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs. What is the NPV of the project using the APV methodology?

Consider a project of the Cornell Haul Moving Company,the timing and size of the incremental after-tax cash flows (for an all-equity firm)are shown below in millions: The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity,the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2?

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: S₁ (€/£)= €2.20 per £ S₁ (€/£)= €1.80 per £ 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 £.

i = r_debt = 10% OCF₀ = −$100,000 K_u = r_assets = 15% OCF_1-4 = $39,800 = 25,000 × ($5 − $3)× (1 − 0.34)+ $20,000 × 0.34 K_l = r_equity = 24.9% OCF₅ = $43,100 = $39,800 + $5,000 × (1 − 0.34)K = r_WACC = 11.20% Tax rate = 34% Debt-to-equity ratio = 3 Risk-free rate = 2% The 5-year project requires equipment that costs $100,000.If undertaken,the shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan with a maturity of 5 years and annual interest payments.The equipment will be depreciated straight-line to zero over the 5-year life of the project.There will be a pre-tax salvage value of $5,000.There are no other start-up costs at year 0.During years 1 through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are no fixed costs. When using the APV methodology,what is the NPV of the interest tax shield?

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States. The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget. The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year. The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S. For simplicity,assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent. Find the break-even price (in dollars)and break-even quantity for the U.S.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 = $1.50.U.S.dollar-denominated government bonds currently have a yield to maturity of 4 percent.Suppose that the European Central Bank is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities: S₁ ($/€)= €1.80 per € S₁ ($/€)= €1.40 per € Following revaluation,the exchange rate is expected to remain steady for at least another year. Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate rises to S₁($/€)= $1.80 per €.

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States. The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget. The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year. The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S. For simplicity,assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent. What is the euro-denominated IRR?

Today is January 1,2009.The state of Iowa has offered your firm a subsidized loan.It will be in the amount of $10,000,000 at an interest rate of 5 percent and have ANNUAL (amortizing)payments over 3 years.The first payment is due December 31,2009 and your taxes are due January 1 of each year on the previous year's income.The yield to maturity on your firm's existing debt is 8 percent.What is the APV of this subsidized loan? Note that I did not round my intermediate steps.If you did,your answer may be off by a bit.Select the answer closest to yours.

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States. The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget. The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year. The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S. For simplicity,assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent. What is the dollar-denominated IRR?

Tiger Towers,Inc.is considering an expansion of their existing business,student apartments.The new project will be built on some vacant land that the firm has just contracted to buy.The land cost $1,000,000 and the payment is due today.Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000.The $3,000,000 construction cost is to be paid today.The project will not change the risk level of the firm.The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year.Variable cost is $3,500 per suite.Fixed costs,excluding depreciation,are $75,000 per year.The project will require a $10,000 investment in net working capital. $r \text { debt }$ = 10.0% $r \text { WACC }$ = 11.20% $r \text { asset }$ = 15.0% tax rate = 34% $\frac { D } { E }$ = 3 $r _ { \text {equity } }$ = 24.9% $r \text { free }$ = 2% The firm's tax rate is 34 percent.The firm's pre-tax cost of debt is 8 percent; the firm's debt-to-equity ratio is 3; the risk-free rate is 3 percent; the beta of the firm's common stock is 1.5; the market risk premium is 9 percent.What is the required return on assets?

Your firm is based in southern Ireland (and thereby operates in euro,not pounds)and is considering an investment in the United States. The project involves selling widgets: you project a sales volume of 50,000 widgets per year,sales price of $20 per widget with a contribution margin of $15 per widget. The project will last for 5 years,require an investment of $1,000,000 at time zero (which will be depreciated straight-line to $10,000 over the 5 years).Salvage value for the equipment is projected to be $10,000.The project will operate in rented quarters: $300,000 rent is due at the start of each year. The corporate tax rate is 12½ percent in Ireland and 40 percent in the U.S. For simplicity,assume that taxes are paid like sales taxes: immediately. The spot exchange rate is $1.50 = €1.00.The cost of capital to the Irish firm for a domestic project of this risk is 8 percent.The U.S.risk-free rate is 3 percent; the Irish risk-free rate is 2 percent. What is CF0 in dollars?