Tuesday, December 14, 2010

Chapter 19

Chapter 19
Multinational Financial Management
SOLUTIONS TO END-OF-CHAPTER PROBLEMS


19-1 $1 = 4.0828 Israeli shekel; $1 = 111.23 Japanese yen; Cross exchange rate, yen/shekel = ?

Cross Rate: .

Note that an indirect quotation is given for Israeli shekel; however, the cross rate formula requires a direct quotation. The indirect quotation is the reciprocal of the direct quotation. Since $1 = 4.0828 shekel, then 1 shekel = $0.244930.

Yen/Shekel = $0.244930 per shekel  111.23 yen per dollar
= 27.2436 yen per shekel.


19-2 kNom, 6-month T-bills = 7%; kNom of similar default-free 6-month Japanese bonds = 5.5%; Spot exchange rate: 1 yen = $0.009; 6-month forward exchange rate = ?

.

kf = 5.5%/2 = 2.75%.

kh = 7%/2 = 3.5%.

Spot exchange rate = $0.009.

=
1.0275 Forward exchange rate = $0.00932
Forward exchange rate = $0.00907.

The 6-month forward exchange rate is 1 yen = $0.00907.


19-3 U.S. T.V. = $500; EMU T.V. = 725 euros; Spot rate between euro and dollar = ?

Ph = Pf(Spot rate)
$500 = 725 euros(Spot rate)
500/725 = Spot rate
$0.68966 = Spot rate.

1 euro = $0.68966 or $1 = 1.45 euros.

19-4 Dollars should sell for 1/1.50, or 0.6667 pound per dollar.


19-5 The price of krones is $0.14 today. A 10 percent appreciation will make it worth $0.154 tomorrow. A dollar will buy 1/0.154 = 6.49351 krones tomorrow.


19-6 Cross rate = kronas/dollar  dollars/pound = kronas/pound
= 10  1.5 = 15 kronas per pound.


19-7 The answer to this question would depend upon the rates existing at the time the assignment is made. Using the rates quoted in the Foreign Exchange table of the February 7, 2003, issue of The Wall Street Journal:

U.S. $ Equivalent Currency per U.S. $
British pound 1.6385 0.6103
Swedish krona 0.1179 8.4818

Cross rate = kronas/dollar  dollars/pound = kronas/pound
= 8.4818  1.6385 = 13.8974 kronas per pound.


19-8 D1 = 3 pounds; Exchange rate = $1.60/pound; Pound depreciates 5% against $1. Dividend grows at 10% and k = 15%. 10 million shares outstanding.

g = - 1 = 4.7619%.

P0 =
P0 =
=
= $46.88372093.

Total equity = $46.88372093  10 million shares
= $468,837,209.


19-9 The U.S. dollar liability of the corporation falls from $0.75(5,000,000) = $3,750,000 to $0.70(5,000,000) = $3,500,000, corresponding to a gain of 250,000 U.S. dollars for the corporation. However, the real economic situation might be somewhat different. For example, the loan is presumably a long-term loan. The exchange rate will surely change again before the loan is paid. What really matters, in an economic sense, is the expected present value of future interest and principal payments denominated in U.S. dollars. There are also possible gains and losses on inventory and other assets of the firm. A discussion of these issues quickly takes us outside the scope of this introductory textbook.
19-10 a. If a U.S. based company undertakes the project, the rate of return for the project is a simple calculation, as is the net present value.

Rate of return = $1,200/$1,000 – 1 = 20%.

NPV = -$1,000 + $1,200/1.14 = $52.63.

b. According to interest rate parity, the following condition holds:

ft/e0 = (1 + kSWISS)/(1 + kUS)
ft/1.62 = (1 + 0.045)/(1 + 0.0725)
ft/1.62 = 0.97436
ft = 1.5785 SF per U.S. $.

c. First, we must adjust the cash flows to reflect Solitaire's home currency.

Year CF ($) CF (SFrancs)
0 -1,000 -1,620.00
1 1,200 1,894.15

Using the Swiss Franc-denominated cash flows, the appropriate rate of return and NPV can be found.

Rate of return = 1,894.15SF/1,620SF - 1 = 16.92%.

NPV = -1,620 + 1,894.15/1.14 = 41.54 Swiss Francs.


19-11 From Table 19-1:

U.S. Dollars
Required to
Buy One Unit of Purchase Price
Currency Foreign Currency  1,000 = in Dollars
British pound 1.5398  1,000 = $1,539.80
Canadian dollar 0.6308  1,000 = 630.80
EMU euro 0.9666  1,000 = 966.60
Japanese yen 0.008273  1,000 = 8.27
Mexican peso 0.1027  1,000 = 102.70
Swedish krona 0.1033  1,000 = 103.30



19-12 a. Again the answer to this problem depends on the date it is assigned.
If the exchange rates taken from the February 7, 2003 issue of The Wall Street Journal are used; then the following information is obtained:

U.S. Dollars
Required to
Buy One Unit of Purchase Price
Currency Foreign Currency  1,000 = in Dollars
British pound 1.6385  1,000 = $1,638.50
Canadian dollar 0.6591  1,000 = 659.10
EMU euro 1.0835  1,000 = 1,083.50
Japanese yen 0.008343  1,000 = 8.34
Mexican peso 0.0917  1,000 = 91.70
Swedish krona 0.1179  1,000 = 117.90

b. Pound = ($1,638.50 - $1,539.80)/$1,539.80 = +0.0641 = +6.41%.

Canadian dollar = ($659.10 - $630.80)/$630.80 = +0.0449 = +4.49%.

Euro = ($1,083.50 - $966.60)/$966.60 = +0.1209 = +12.09%.

Yen = ($8.34 - $8.27)/$8.27 = +0.0085 = +0.85%.

Peso = ($91.70 - $102.70)/$102.70 = -0.1071 = -10.71%.

Krona = ($117.90 - $103.30)/$103.30 = +0.1413 = +14.13%.


19-13 a. The automobile’s value has increased because the dollar has declined in value relative to the yen.

b. 245/121 = 2.0248, so $9,000  2.0248 = $18,223.14  $18,223.

Note that this represents a 3.8 percent compound annual increase over 19 years.


19-14 a. C$4,000,000/C$1.4430 = $2,772,002.77  $2,772,003, or
C$4,000,000  $0.6930 = $2,772,000.
(Difference is due to rounding.)

b. C$4,000,000/C$1.4401 = $2,777,585, or
C$4,000,000  0.6944 = $2,777,600.

c. If the exchange rate is C$1.20 to $1 when payment is due in 3 months, the C$4,000,000 will cost:

C$4,000,000/C$1.20 = $3,333,333,

which is $561,330 more than the spot price today and $555,748 more than purchasing a forward contract for 90 days.
19-15 a. kNom of 90-day U.S. risk-free securities = 5%; kNom of 90-day British risk-free securities = 5.3%; spot rate: 1 pound = $1.65; forward rate selling at premium or discount = ?

.

kh = 5%/4 = 1.25%; kf = 5.3%/4 = 1.325%; spot rate = $1.65.

=
= 0.9993
Forward exchange rate = $1.6488.

The forward rate is selling at a discount, since a pound buys fewer dollars in the forward market than it does in the spot. In other words, in the spot market $1 would buy 0.6061 British pounds, but at the forward rate $1 would buy 0.6065 British pounds; therefore, the forward currency is said to be selling at a discount.

b. The 90-day forward rate is $1.6488.


19-16 Spot rate: 1 yen = $0.0086; Forward rate: 1 yen = $0.0086; kNom of 90-day Japanese risk-free securities = 4.6%; kNom of 90-day U.S. risk-free securities = ?

kf = 4.6%/4 = 1.15%; kh = ?

=
=
1 =
1 + kh = 1.0115
kh = 0.0115.

kNom = 1.15%  4 = 4.6%.


19-17 $1 = 7.8 pesos; CD = $15.00; Price of CD in Mexico = ?

1 Peso = 1/7.8 = $0.1282.

Ph = Pf(Spot rate)
$15 = Pf($0.1282)
= 117 pesos.

Check: Spot rate = $15/117 pesos = $0.1282 for 1 peso.

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