Regent Park

Chapter 7 Essay Qs 1. first principle potful, a Canadian mansion, postulates to float a bond issue in the United Kingdom. Which choices does the phvirtuosor have? contend the main characteristics of severall(a)y filling. What do you recommend? reaction first rudiment friendship can issue foreign bonds (Bulldogs) or Eurobonds. Foreign bonds atomic military issue 18 bonds issued by a foreign borrower in a case commercialise, in the national currency, and subject to the national securities regulations. Eurobonds argon bonds sold in countries other the rural argona that issued the denominating currency.Foreign bonds tend to be registered bonds and subject to the local regulations while Eurobonds tend to be be atomic number 18r bonds. Generally, foreign bonds are more costly than Eurobonds. T here(predicate)fore, Eurobonds are probably the better filling. page 157-158 2. A- Canada Inc. has issued a dual-currency bond that pays $555. 10 at adulthood per SF1,000 of par va lue. The caller-outs gold f scummys are exclusively in Canadian clams. a) What is the implicit $/SF counterchange put at adulthood? b) go forth the company be better or worse off if the true commutation measure at maturity is $0. 6123/SF? event a) $555. 10/SF 1,000 = $ 0. 5551 b) The company will be better off.Page 175, problem 3 3. ZZZ Corp. wants to issue zero-coupon bonds with a 10-year maturity. The implied slacken off to maturity on these bonds is 5% and ZZZ Corp. wants to raise $10,000,000. ( evolve no operation costs). How much gold will ZZZ Corp. have to pay at maturity of the bond? Answer 10,000,000 (1. 05)10 = $16,288,946. 27 4. Assume desire of Montreal has two zero-coupon bonds outstanding, individually for a display case value $100,000,000. adhesion A matures in 10 days and sells at a discount of 35% off face value and bond B matures in 20 years and sells at a discount of 60% off face value. drive the implied open to maturity of each bond.Answer co nstipate A 650,000,000(1 + i)10 = 100,000,000 i = 4. 4% splice B 400,000,000(1 + i)20 = 100,000,000 i = 4. 67% 5. What happens to the present value of the bonds in 4. , if the implied yield to maturity increases by 1%? Answer Bond A 100,000,000/(1. 054)10 = 59,100,872. 35 The present value of the bond decreases by 65,000,000 59,100,872. 35 = 5,899,127. 65 Bond B 100,000,000/(1. 0567)20 = 33,186,836. 18 The present value of the bond decreases by 40,000,000 33,186,836. 18 = 6,813,163. 82 Chapter 8 Question 1. Assume that go up packages are trading at SF 300 in Zurich and $ 51 in New York. for each sensation per centum equals 4 ADRs.The on-going deepen localize is SF1. 5/$. In the absence of transaction costs, can you top an arbitrage gain ground? Answer Yes. defile one share in Zurich for SF 300 or $ 200 (300/1. 5), reciprocation to ADRs and sell the ADRs for 4*51 = $204 profit $4 Question 2. Assume that Nestle shares are trading at SF 300 in Zurich and $ 51 in New York. Each share equals 4 ADRs. The current change position is SF1. 5/$. If transaction costs are $1 per ADR, can you make an arbitrage profit? Answer No, transaction costs = potential profit Potential profit in the absence of transaction costs secure one share in Zurich for SF 300 or $ 200 (300/1. ), alternate to ADRs and sell the ADRs for 4*51 = $204 profit $4 Question 3. What factors go into the finality to cross-list on a foreign exchange? Answer When deciding whether to cross-list shares on a foreign exchange, the upstanding has to consider the expected benefits and costs. The benefits may be to establish a broader investor base for its stock, to establish name recognition in foreign capital markets, thus paving the way for the mansion to witness new equity and debt capital from investors in different markets, and to expose the firms name to a broader investor and consumer groups.The costs include listing fees, propitiation of the accounting standards of two countries, com pliance with the regulations of the foreign exchange, and investor relations. page 187. Question 4. Assume that Accor shares are trading at A$2. 5 in Sydney and $28 in New York. Each ADR equals 20 shares. The current exchange come out is A$1. 5/$. In the absence of transaction costs, can you make an arbitrage profit? Answer Yes. Buy one ADR in New York for $28 (or A$42), exchange to shares and sell the shares for A$50 profit A$8 Question 5. Assume that Accor shares are trading at A$2. 5 in Sydney and $28 in New York.Each ADR equals 20 shares. The current exchange rove is A$1. 5/$. At what transaction cost per share would there be no profit opportunity? Answer A$8/20 = A$0. 4 Buy one ADR in New York for $28 (or A$42), exchange to shares and sell the shares for A$50 profit A$8 less transaction cost of 20*. 4 = A$8 profit = 0 Chapter 9 I dont believe there will be anything from here tho Chapter 10 Question 1. The following information is given Both parties want to engage in an enga gement number business deal. Assume that S Bank will arrange for an have-to doe with point swap between X friendship and Y Company for 0. % . Also, assume that X Company gets 2/3 of the interest savings forthcoming. a) Which company has a better address score? b) What is the quality spread differential? c) What is X Companys electred type of debt? What rate of interest does it pay on this debt after the swap? d) What is Y Companys pet type of debt? What rate of interest does it pay on this debt after the swap? e) Illustrate the funds flows from this swap. Assume that X Company pays LIBOR to S Bank. Answer a) X Company b) QSD = 2 1. 3 = 0. 7 c) Floating LIBOR . 4 d) dictated 6. 8% e) Question 2.The following information is given. ABC Inc. and XYZ Inc. have concord to swap their debt payments so that each firm gets its preferred debt terms. They can arrange an interest rate swap through Big Bank. Big brim charges 0. 15% for its services. The be savings from the interest rate swap are equally share by A and B. QSD 1% . 25% = . 75% after bank fees . 75% . 15% = . 60% savings available a) Does ABC Inc. prefer frosty or go rate debt? What rate does it pay on its preferred debt? b) Does XYZ Inc. prefer mend or floating rate debt? What rate does it pay on its preferred debt? ) What are the total interest savings available in this interest rate swap? d) Which company has a better credit rating? Answer a) ABC Inc. prefers floating and pays LIBOR + . 2 b) Interest Savings 0. 6%. QSD bank fees = (6 5) (LIBOR + . 75 LIBOR + 0. 50) 0. 15 c) XYZ Inc. prefers fixed and pays 5. 7% d) Company ABC has a better credit rating Question 3. The following information is given. Boeing and Airbus have agreed to swap their debt payments so that each firm gets its preferred debt terms. Each firm will save the resembling standard in servingage terms. ) Does Boeing prefer fixed or floating rate debt? What rate does it pay on its preferred debt? b) Does Airbus prefer f ixed or floating rate debt? What rate does it pay on its preferred debt? c) What are the total interest savings available in this interest rate swap? d) Which company has the advantage in fixed rate debt? Answer a) Boeing prefers floating and pays LIBOR + 0. 05%. b) Airbus prefers fixed and pays 5. 5%. c) Interest Savings 0. 4%. d) Boeing has the advantage in fixed dollar debt. Question 4. ABC Corporation has entered into a 10-year interest rate swap with a swap bank. ABC Corp. ays the swap bank a fixed-rate of 6 percent one-yearly on a notional amount of EUR100,000,000 and receives LIBOR ? percent. What is the charge of the swap on the seventh limit date, expect that the fixed-rate at which ABC can borrow has decreased to 5%. Answer PV of a supposed bond issue of EUR100,000,000 with three be 6 percent coupon payments at the new fixed rate of 5 percent is EUR100,000,000/1. 1576 = EUR86,385,625. 54 PV of the three coupon payments is (6,000,000/1. 05) + (6,000,000/1. 1025) + ( 6,000,000/1. 1576) = EUR 16,339,488. 18 PV of the Bond and its coupon is = 102,725,113. 1 Therefore, the price of the swap = 100,000,000 102,725,113. 61 = 2,725,113. 61 Question 5. Canada Corporation enters into a 2-year interest rate swap with Bank A in which it agrees to pay the swap bank a fixed-rate of 5 percent annually on a notional amount of US$1,000,000 and receive LIBOR 1 percent. pay off the price of the swap on the first reset date, assuming that the fixed-rate at which Canada Corporation can borrow has stayed unchanged. Answer PV of a hypothetical bond issue of US$ 1,000,000 with one remaining 5 percent coupon payments at the fixed rate of 5 percent is US$1,000,000Therefore, the price of the swap = 1,000,000 1,000,000 = 0 Chapter 11 Question 1. A US investor bought shares in ABC Inc. on the Frankfurt Stock Exchange 2 years past for EUR 10,000. The exchange rate at that time was EUR 1. 20/USD. Currently, the shares are expenditure EUR 11,000 and the exchange rate is EUR 0. 80/$. Calculate the investors annual percentage rate of offspring in terms of the U. S. dollars. Answer The annual percentage rate of picture is 28. 45%. 2-year rate of return = (11,000/0. 8 10,000/1. 2)/(10,000/1. 2) = 0. 65 (1 + r)2 = 1. 65 r = 0. 2845 Question 2. A US investor bought shares in ABC Inc. n the Frankfurt Stock Exchange 2 years ago for EUR 10,000. The exchange rate at that time was EUR 1. 20/USD. Currently, the shares are worth EUR 11,000 and the exchange rate is EUR 0. 80/$. The investor had sold EUR 10,000 (the principal investment amount at the same time that the stock was purchased) front at the forward exchange rate of EUR 1. 15/$. What is the dollar rate of return? Assume that the un hold overd portion of the investment is exchanged at the current exchange rate. Answer The annual dollar rate of return is 9. 25%. 2-year rate of return = (10,000/1. 15 + 1,000/0. 8 10,000/1. )/(10,000/1. 2) = 0. 1935 (1 + r)2 = 1. 1935 r = 0. 0925 Question 3. In May 200 3 when the exchange rate was fade 110/$, Nissan Motor Company invested ? 1,100,000,000 in pure-discount U. S. bonds and liquidated the investment one year later when the exchange rate was Yen one hundred five/$. The Yen rate of return earned on this investment was 10%. a) Calculate the dollar amount that the bonds were sold at. b) Calculate the dollar rate of return of this investment. Answer a) The dollar amount that the bonds were sold at is $11,523,809. 0. 1 = (X*105 1,100,000,000)/1 ,100,000,000) b) The dollar rate of return is15. 4%. (11,523,809 10,000,000)/10,000,000 = . 1524 Question 4. A Canadian investor buys shares in DaimlerChrysler on the New York Stock Exchange when the stocks price and the exchange rate were US$ 40 and US$0. 70/C$ respectively. One year later the investor sells the shares for US$ 41 and the exchange rate is US$0. 80/$. a) Calculate the investors annual percentage rate of return in terms of the U. S. dollars. b) Calculate the investors annual percenta ge rate of return in Canadian dollars. Answer a) tread of return (41 40)/40*100 = 2. 5% b) Purchase price in Canadian dollars = 40/. 70 = 57. 4 Selling price in Canadian dollars = 41/. 80 = 51. 25 Therefore, the Canadian dollar rate of return is R(C$) = (51. 25 57. 14)/51. 25 100 = 10. 313% Chapter 12 1. How can operational icon be managed? Answer The object of managing operate exposure is to stabilize cash in flows when exchange range are fluctuating. There are a number of ways in which operating exposure can be managed (1) selecting low cost production sites (2) using a flexible sourcing policy (3) diversification of the market (4) product differentiation and R&D efforts (5) financial hedgerow page 302-304 Question 2.Banff Inc. is headquartered in Calgary and produces high-end living inhabit furniture. The firm has a secondary in Germany. The woody frames of the sofas are do in Calgary by an freelancer contractor and past shipped to Germany. The German adjunct then upholsters the sofas using Belgium fabrics. Each frame costs the appurtenant C$1,500. The materials and labour for the upholstery amount to euro 2,000 per sofa. Fixed overhead costs are euro 1,500,000 for the subsidiary. Banff Inc. expects to be able to sell 3,000 Sofas for 5,000 euros each. The firm can depreciate 1,000,000 euros per year.The German income evaluate rate is 40%. The current exchange rate is C$1. 5/euro. How would the operating cash flows (expressed in Canadian dollars) change if the exchange rate is C$1. 6/euro, all else equal? Answer The operating income would increase by C$340,000. Question 3. Banff Inc. is headquartered in Calgary and produces high-end living room furniture. The firm has a subsidiary in Germany. The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany. The German subsidiary then upholsters the sofas using Belgium fabrics.Each frame costs the subsidiary C$1,500. The materials and labour for the upholstery amount to euro 2,000 per sofa. Fixed overhead costs are euro 1,500,000 for the subsidiary. Banff Inc. expects to be able to sell 3,000 Sofas for 5,000 euros each. The firm can depreciate 1,000,000 euros per year. The German income tax rate is 40%. The current exchange rate is C$1. 5/euro. How would the operating cash flows (expressed in Canadian dollars) change if the exchange rate is C$1. 4/euro, all else equal? Answer The operating income would decrease by C$ 340,000. Question 4. Banff Inc. s headquartered in Calgary and produces high-end living room furniture. The firm has a subsidiary in Germany. The wooden frames of the sofas are made in Calgary by an independent contractor and then shipped to Germany. The German subsidiary then upholsters the sofas using Belgium fabrics. Each frame costs the subsidiary C$1,500. The materials and labour for the upholstery amount to euro 2,000 per sofa. Fixed overhead costs are euro 1,500,000 for the subsidiary. Banff Inc. expects to be able to sell 3,000 Sofas for 5,000 euros each. The firm can depreciate 1,000,000 euros per year.The German income tax rate is 40%. The current exchange rate is C$1. 5/euro. How would the operating cash flows (expressed in Canadian dollars) change if the exchange rate is C$1. 4/euro, the German inflation rate is 3% merely the firm will not be able to raise the price for its products and due to new competition from the Russian market (with a more favorable exchange rate) unit sales omit to 2,500? Answer The operating income would decrease by C$ 1,276,000. Question 5. ABC Inc. , a Canadian wallpaper manufacturer, has a subsidiary in the United States which sources its wood from Canada.The US dollar depreciates rapidly. Discuss the likely competitive and conversion effects of the depreciation of the US dollar. Answer The depreciation of the US dollar may alter the firms competitive position in the US market place. prime(prenominal) of all, the input costs of the subsidiary in ter ms of US dollars are increasing. If the competitors source their raw materials in the United States, the competitive position of ABC Inc. s subsidiary will be eroded. The conversion effect implies in this case that the US dollar operating cash flows will be translated into a lower Canadian dollar value. page 297-298Chapter 13 1. Sonnenschein A. G. , a German retailer of solar panels clean bought panels for US $ 100,000 to be gainful in 120 days. As the financial manager, you are responsible for do a pass on the best hedging choice available to Sonnenschein A. G. You check with your banker and begin out the following The moment bid and choose rank are USD 1. 1001/EUR and USD 1. 0953/EUR respectively and the 120-day forward rates are EUR 0. 8850/USD and EUR 0. 8950/USD. Determine the crystallize payables if Sonnenschein gives a forward hedge to manage its payables. Answer US$ 100,000*0. 8950 = EUR 89,500 Question 2. Pile-of-Bones Inc. , headquartered in Regina, just bought s nowblowers for US $ 100,000 to be paid in 90 days. As the financial manager, you are responsible for making a recommendation on the best hedging choice available to Pile-of-Bones Inc. You check with your banker and find out the following The current spot rate is C$ 1. 35/US$ and the 90-day forward rate is C$1. 36/US$. The interest rates are 5% in the United States and 6% in Canada. a) What are the net payables if Pile-of-Bones holds a forward hedge? b) What are the net payables if Pile-of-Bones uses a money market hedge? ) Which type of hedge should Pile-of-Bones use? Answer a) 100,000*1. 36 = 136,000 b) 100,000/(1 + . 05/4) = 98,765. 43 98,765. 43*1. 35 = 133,333. 33 133,333. 33*(1 + . 025) = 136,666. 67 c) Pile-of-Bones should use forward hedge. Question 3. Soleil Inc. , a French manufacturer of sunscreen, has agreed to sell sunscreen to a Danish retailer for 2 meg Danish kroner to be received in 180 days. The current spot rate is DKR5. 02/EUR and the 180-day forward rate is DKR 5. 23/EUR. The current interest rates are 5% in Denmark and 4% in France. Should the firm use a forward hedge or a money market hedge?Explain. Answer The net proceed from a forward hedge are 2,000,000/5. 23 = 382,409. 17 The net proceeds from a money market hedge are 2,000,000/(1. 05) = 1,903,761. 90 1,903,761. 90/5. 02 = 379,434. 64 379,434. 64*1. 04 = EUR394,612. 02 Since the net proceeds from the money market hedge are higher(prenominal) than from a forward market hedge, Soleil should use the money market hedge. Question 4. Quebec Inc. , manufactures prefabricated houses in Quebec and sells them all over the world in local currencies. The firm has just received an order from China for renminbi 8,280,000 to be paid at obstetrical delivery in 1 year.The Chinese renminbi is pegged to the US dollar at an exchange rate of 8. 28 per dollar. Does Quebec Inc have a transaction exposure? Explain. Answer Quebec Inc is exposed to exchange rate risk. First of all, the Chinese government ma y choose to change the exchange rate at which the renminbi is pegged or drop the peg altogether within the next year. Even if the government does not intervene, Quebec Inc. is exposed to the US dollar-Canadian dollar exchange rate since the renminbi is pegged to the US dollar sign and not the Canadian dollar. Question 5. Fashion Shoes Inc. anufactures its shoes in Milano, Italy. The company just received an order from the United States for USD 1 million to be received in one year. The current spot rate is EUR 1 /USD and the 1 year forward rate is EUR 1. 01/USD. The current interest rates are 4% in the United States and 5% in Italy. A call option on the US dollar is available with a strike price of EUR 1. 01/USD and a aid of EUR 0. 03 and a put option is available with a strike price of EUR 1/USD and a premium of EUR 0. 025/USD. Determine the net proceeds from a forward hedge and an options hedge. Which option should Fashion Shoes use?Answer Forward hedge USD 1,000,000*1. 01 = EUR 1,010,000 cream hedge Use the put option on the USD. Net proceeds from the options hedge Strike price USD 1,000,000*1 = EUR 1,000,000 Less premium in year 1 euros 1,000,000*0. 025(1 + . 05) = 26,250 net proceeds 1,000,000 26,250 = 973,750. The choice of the hedging scheme depends on exchange rate expectations. The option will provide a minimum of EUR 973,750 but if the dollar strengthens (i. e. the spot rate in one year is greater than EUR1. 03625/USD) the option will provide higher cash flows than the forward hedge.