Exam 23: International Corporate Finance

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -Using the covered interest parity condition, the calculated three-year forward rate F₃ is closest to ________.

Use the information for the question(s)below. KT Enterprises, a U.S. import-export trading, is considering its international tax situation. Currently KT's U.S. tax rate is 35%. KT has significant operations in both Japan and Ireland. In Japan, the current exchange rate is ¥118.4/$ and earnings in Japan are taxed at 41%. In Ireland the current exchange rate is $1.27/€ and earnings in Ireland are taxed at 12.5%. KT's profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are shown here (in millions): -After the Japanese taxes are paid, the amount of the earnings before interest and after taxes in dollars from the Japanese operations is closest to ________.

Which of the following statements is FALSE?

U.S. tax liabilities are ________ until the foreign subsidiary profits are repatriated to the United States.

A ________ strategy replicates the forward contract by borrowing in one currency, converting to the other currency and investing in the new currency.

Suppose the domestic cost of capital for a U.S.-based company is 8%. Also, the U.S. interest rate is 4% and the European interest rate is 7%. What is the foreign denominated cost of capital for the company?

What is a currency forward contract?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

What is cash-and-carry strategy?

Assume IBM enters into a forward contract to purchase 100,000 euros at a rate of $1.60/euro one year from today. If the spot exchange rate is $2/euro one year later, what is the dollar amount that IBM must pay to receive the euros?

A U.S.-based firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100,000 euros after one year. If the one-year forward exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV)of the project cash flows?

Consider the following equation: = (1 + )- 1 The term in this equation refers to ________.

What are internationally segmented capital markets?

One British pound can be purchased for $1.65. What is the exchange rate in terms of pounds per dollar?

Under U.S. tax law, a multinational corporation may use any excess tax credits generated in high-tax foreign countries to offset its net U.S. tax liabilities on earnings in low-tax foreign countries.

The implied foreign interest rate computed using spot and forward exchange rates may be lower than the actual foreign interest rate if the foreign country has a high ________.

Use the information for the question(s)below. You are a U.S. investor who is trying to calculate the present value (PV)of £5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.8839/£ and the forward rate is F₁ = $1.8862/£. The appropriate dollar discount rate for this cash flow is 5.32% and the appropriate £ discount rate is 5.24%. -You are a U.S. investor who is trying to calculate the present value (PV)of £15 million cash inflow that will occur one year from now. The spot exchange rate is $1.5742/£ and the forward rate is F₁ = $1.5682/£. The appropriate dollar discount rate for this cash flow is 1.05% and the appropriate £ discount rate is 1.45%. What is the present value of the £ cash inflow computed by first discounting the £ and converting them into dollars?

Which two currencies account for more than half of all the trading volume in the foreign exchange market?