Exam 18: International Capital Budgeting

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.

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

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 today 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? If you rounded in your intermediate steps,the answer may be slightly different from what you got.Choose the closest.

When using the APV methodology,what is the NPV of the interest tax shield?

What is the levered after-tax incremental cash flow for year 1?

What is the levered after-tax incremental cash flow for year 0?

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

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 falls to S₁(€|£)= €1.80 per £.

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.

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

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 = $1.50. U.S. dollar-denominated government bonds currently have a yield to maturity of 4%. Suppose that the European Central Bank is considering either tightening or loosening its monetary policy. It is widely believed that in one year there are only two possibilities: (\ \mid\epsilon)=\ 1.80 per \epsilon (\ \mid\epsilon)=\ 1.40 per \epsilon Following revaluation, the exchange rate is expected to remain steady for at least another year. -Your banker quotes the euro-zone risk-free rate at i_€ = 5% and the U.S.risk free rate at i_$ = 4%.Find the value of the option and thereby the correct value of the bond to a U.S.investor.

The required return on assets is 18%.The firm can borrow at 12.5%; firm's target debt to value ratio is 3/5.The corporate tax rate is 34%,and the risk-free rate is 4% and the market risk premium is 9.2 percent.What is the weighted average cost of capital?

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

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?

Perhaps the most important decisions that confront the financial manager are

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.

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

Your firm is in the 34% tax bracket.The yield to maturity on your existing bonds is 8%.The state of Georgia offers to loan your firm $1,000,000 with a TWO year AMORTIZING loan at a 5% rate of interest and ANNUAL payments due at the END OF THE YEAR. The interest will be deductible at the time that you pay.What is the APV of this below-market loan to your firm? I did not round any of my intermediate steps.You might be a little bit off.Pick the answer closest to yours.

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

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