Exam 18: International Capital Budgeting

What is CF1 in dollars?

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

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 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: (\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 falls to S₁(€|£)= €1.80 per £.

Given the following information for a levered and unlevered firm,calculate the difference in the cash flow available to investors.Assume the corporate tax rate is 40%. (Hint: Calculate the tax savings arising form the tax deductibility of interest payments). Levered Unlevered Revenue \ 250 \ 250 Operating cost -\ 100 -\ 100 Interest expense -\ 20 \ 0

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 the notion of hedging,make a recommendation vis-à-vis how to undertake the project today without "buying" the option.

What is the euro-denominated IRR?

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%.Calculate the weighted average cost of capital.

In the APV model

The "incremental" cash flows of a capital project is calculated by using:

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. -Your banker quotes the euro-zone risk-free rate at i_€ = 6% and the British risk free rate at i_£ = 6%.Find the value of the option and thereby the project.

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% 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%.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.

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. -Using the notion of a hedge ratio,make a recommendation vis-à-vis how to undertake the project today without "buying" the option.

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. -What should Strik-it-Rich's management do?

What is the dollar-denominated IRR of this project?

Repeat the above project analysis assuming that the Irish firm could replicate the project in Ireland.(i.e.cash flow out the project in Ireland and find break-even price (in €),quantity,NPV,IRR (in euro not dollars).

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 dollar cash flows to compute the dollar-denominated NPV of this project.

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

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