Exam 18: International Capital Budgeting

Your firm's existing bonds trade with a yield to maturity of eight percent.The state of Missouri has offered to loan your firm $10,000,000 at zero percent for five years.Repayment will be of the form of $2,000,000 per year for five years,the first payment is due in one year.What is the value of this offer?

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

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: (\mid£)=2.20 per £ (\mid£)=1.80 per £ 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 £.

What is the levered after-tax incremental cash flow for year 2?

Using the APV method,what is the value of this project to an all-equity firm?

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the required return on assets?

Assume that XYZ Corporation is a leveraged company with the following information: = cost of equity capital for =13\% i= before-tax borrowing cost =8\% t= marginal corporate income tax rate =30\% Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3%.

What is CF0 in dollars?

The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.What is the firm's cost of equity capital?

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 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: (\ \mid\epsilon)=\ 1.80 per \epsilon (\ \mid\epsilon)=\ 1.40 per \epsilon Following revaluation, the exchange rate is expected to remain steady for at least another year. -Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate rises to S1($|€)= $1.80 per €.

An Italian firm is considering selling its line of coin-operated cappuccino machines in the U.K.The business risk will be identical to the firm's existing line of business in the euro zone,the cost of capital in the euro zone is i_€ = 10%.The expected inflation rate over the next two years in the U.K.is 3% per year and 2% per year in the euro zone.The spot exchange rates are $1.80 = £1.00 and $1.15 = €1.00. The pound sterling denominated cash flows are as follows: What is the €-denominated NPV of this project? I did not round my intermediate steps,if you did,select the answer closest to yours.

The adjusted present value (APV)model that is suitable for an MNC is the basic net present value (NPV)model expanded to

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: (\mid£)=2.20 per £ (\mid£)=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 £.

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

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: (\ \mid\epsilon)=\ 1.80 per \epsilon (\ \mid\epsilon)=\ 1.40 per \epsilon Following revaluation, the exchange rate is expected to remain steady for at least another year. -Using your results to the last question,make a recommendation vis-à-vis when to buy the bond.

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?

In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to

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.

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%.

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: (\mid£)=2.20 per £ (\mid£)=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 rises to S₁(€|£)= €2.20 per £.