Numerade

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Bluesky is based in Australia and reports in Australian Dollars (AUD). It plans to build a green energy powered steel mill in Indonesia with project cash flows denominated in Indonesian Rupiah (IDR). The spot exchange rate is currently AUD/IDR 1.6. The upfront (t=0) capital investment required is 420 IDR. The project’s annual after-tax cash flows are expected to be 120 IDR per year for 25 years (t=1 to 25). The after-tax salvage value of the equipment in 25 years (t=25) is expected to be 150 IDR. The after-tax clean up and decommissioning costs in 25 years (t=25) are expected to be 270 IDR. The after-tax weighted average cost of capital used for similar projects in Australia is 11.0 percent per annum. The risk-free interest rate in Australia is currently 3.0 percent per annum. The risk-free interest rate in Indonesia is currently 6.0 percent per annum. 1. What is the appropriate after-tax weighted average cost of capital that Bluesky should use on project cash flows denominated in Indonesian Rupiah (IDR) to calculate an NPV also denominated in Indonesian Rupiah (IDR)? 2. Calculate the Net Present Value of the project in Indonesian Rupiah (IDR)? 3. Calculate the Net Present Value of the project in Australian Dollar (AUD)? 4. A work colleague studied Corporate Finance as part of their MBA but did not study Advanced Finance. They incorrectly convert all of the project’s expected future cash flows at the current spot exchange rate and then discounts the cash flows using the company’s standard domestic after-tax weighted average cost of capital. What is the Net Present Value that they would be expected to calculate using their incorrect method?

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Chipzilla designs and manufactures circuit boards for computers. It has just signed a contract to supply 60,000 circuit boards at a fixed price in 12 months from now. The quantity of gold used to manufacture one circuit board is 0.01 ounces. Chipzilla will need to pay gold suppliers based on the spot gold price in 6 months from now. The company is concerned that changes in the price of gold could affect profit margins. The net convenience yield of gold is currently -1.0 percent per annum (note the minus sign). The risk-free interest rate is 5.0 percent per annum. There are 100 ounces of gold in one gold futures contract. The current spot price for gold is 1050 dollars per ounce. 1. What is the current price on the gold futures contract required to hedge this gold expense?

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Lambda sells electric lawnmowers to the consumer market. Lambda’s only debt is a zero-coupon bond with a face value of 100 dollars that matures 9 months from today. Larry, the CEO of Lambda, is concerned that his company may need to default on these bonds. He estimates that Lambda’s market value of assets could be worth either 130 dollars or 90 dollars in 9 months. He estimates that the risk-neutral probability that Lambda’s assets are only worth 90 dollars is 20.0 percent. The risk-free interest rate is currently 5.0 percent per annum. 1. What is Lambda’s option to default worth in 9 months if the market value of assets is 90 dollars? 2. What is the risk-neutral value of Lambda’s option to default worth today? 3. What is the risk-neutral market value of Lambda’s debt today including the probability of default? 4. What is the market value of Lambda’s equity in 9 months if the market value of assets is 130 dollars? 5. What is the risk-neutral value of the shareholder’s option to buy Lambda’s assets off the debtholders in 9 months worth today? 6. What is the current market value of assets of Lambda?

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Amazonia provides a range of online shopping and web services and is listed on the stock exchange. It is currently the subject of a takeover offer that is expected to take 9 months to be resolved. The current stock price is 55 dollars. If the takeover offer is successful, shareholders will receive 70 dollars per share in 9 months from now. If the takeover offer is unsuccessful, the stock price is expected to fall to 35 dollars in 9 months from now. A call option written on this stock has an exercise price of 50 dollars and will mature in 9 months. The risk-free interest rate is 3.0 percent per annum. 1. What will be the value of the call option in 9 months if the takeover is successful? 2. Calculate the Delta of the call option? 3. There is a combination of a stock and a bond that replicates the payoffs of the call option under the two possible future outcomes. Calculate the cost of buying the correct number of shares in the replicating portfolio today? 4. Calculate the benefit of selling the correct number of risk-free bonds in the replicating portfolio today? 5. Calculate the current price of the call option using the replicating portfolio technique?

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Amazonia provides a range of online shopping and web services and is listed on the stock exchange. It is currently the subject of a takeover offer that is expected to take 9 months to be resolved. The current stock price is 55 dollars. If the takeover offer is successful, shareholders will receive 70 dollars per share in 9 months from now. If the takeover offer is unsuccessful, the stock price is expected to fall to 35 dollars in 9 months from now. A call option written on this stock has an exercise price of 50 dollars and will mature in 9 months. The risk-free interest rate is 3.0 percent per annum. 1. There is a combination of a stock and a bond that replicates the payoffs of the call option under the two possible future outcomes. Calculate the cost of buying the correct number of shares in the replicating portfolio today?

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Which of the following statements about exchange rate relationships are TRUE? 1. If the United States currently has a higher one-year risk-free nominal interest rate than Australia, the AUD/USD spot exchange rate would be expected to decrease over the next year. 2. If the United States has a lower rate of inflation than Australia, the forward AUD/USD exchange rate would be expected to be lower than the spot AUD/USD exchange rate.

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Nick Johnson

Numerade educator

Are Financial leases are evaluated by discounting lease cash flows at the company's after-tax cost of debt?

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A sinking fund may be useful to a corporation because: A. the payments to the sinking fund are not necessary when the firm is in financial difficulty. B. it may provide the corporation with the option to acquire the bonds at the lower of face value or market price. C. the corporation does not have to worry about paying the bondholders. D. they are simple and easy to monitor.

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ANSWERED

Nick Johnson

Numerade educator

Which of the following statements about bond yields are TRUE? 1. Generally, expected yields are at least as great as promised yields. 2. Generally, a corporate bond has a higher promised yield than the yield on a similar government bond.

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Aparna Shakti

Numerade educator

Which of the following statements about European options based on the same stock with the exercise price and maturity date are TRUE? 1. Value of Put = Value of Call + Stock Price – Present Value of Exercise Price. 2. Value of Call = Value of Put – Stock Price + Present Value of Exercise Price.

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Karen N.