Exercises for Exam

8/6/2019 Exercises for Exam

1/21

Q.6

Bid price 0.53

Ask price 0.55

Spread 3.64%

Q.8

No, it should not hedge: if contracts are invoiced in $ the exporter will receive re

Moreover, if $ appreciates, GBP will depreciate and thus UK exports will become

Q.10

Direct

GBP:Euro 0.69 1

Indircet

Euro: GB 1.46 1

Q.11

GBP:Zloty 0.17 1

GBP:Yen 0.01 1

Yen:Zlot 34 1

Q.18

Exch.rate

was GBP:C$ 0.43 1

Airport GBP:C$ 0.4 1

GBP:Peso 0.06 1

Peso:C$ 7.27 1

Tourist cash 1500 Pes 200 C$

Peso:C$ 7.5 1

I should accept the tourist's offer because his exchange rate of C$ is better.


2/21

latively more. No exposure risks.

relatively cheaper which is an advantage for the exporter (US consumers will b


3/21

y more of its products).


4/21

Q.4

F 0.05

S 0.05

n 90

Premium 3.98

Q.5

A forward contract can backfire if MNC is an importer and there was a fall in the

Q.12 a Seller of a Call-option

0.01

Units 50000

Strike 0.55

Spot 0.63

Loss 3500

Q.13 a Seller of a Put-option

0.02

Units 50000

Strike 0.42

Spot 0.4

Gain 0.00

Premiumper Unit

Premiumper Unit


5/21

alue of the currency, if Spot rate on the day the forward was exercised was low


6/21

r than fixed Forward rate.


7/21

Year 0 Year 1 Year 2

A. NZ Financing. Yes, the project should be accepted. Cunulatice NPV (

in NZ $ - Subsidiary Perspective

1 Demand (units) 40,000.00 50,000.00

2 Price per Unit 500.00 511.00

3 Total Revenue 20,000,000.00 25,550,000.00

4 30.00 35.00

5 Total Variable Cost 1,200,000.00 1,750,000.00

6 Fixed Costs 6,000,000.00 6,000,000.00

7 Interest Expense 2,800,000.00 2,800,000.00

8 5,000,000.00 5,000,000.00

9 15,000,000.00 15,550,000.00

10 5,000,000.00 10,000,000.00

11 Local Taxes (30%) 1,500,000.00 3,000,000.00

12 3,500,000.00 7,000,000.00

13 8,500,000.00 12,000,000.00

14 8,500,000.00 12,000,000.00

15 Withholding Tax 0.10 0.10

16 7,650,000.00 10,800,000.00

17 Salvage Value

in Euro - Parent Perspective

18 Salvage Value

19 0.52 0.54

20 CF to Parent 3,978,000.00 5,832,000.00

21 PV of Parent's CF 3,315,000.00 4,050,000.00

22 25,000,000.00

23 Rate of Return 0.20 0.20

24 Cumulative NPV 21,685,000.00 17,635,000.00

B.

in NZ $ - Subsidiary Perspective

7,800,000.00 12,800,000.00

5,460,000.00 8,960,000.00

10,460,000.00 13,960,000.00

9,414,000.00 12,564,000.00

Variable Cost perUnit

Non-cash Exp.(Depreciation)

Total Expenses(5+6+7+8)

Operating Income(before tax) (3-9)

Operating Income(after tax) = NetIncome

Net CF toSubsidiary (12+8)

Funds Remitted bySubsidiary (100%)

Funds Remitted toParent (Tax Credit)

NZ$

Initial Parent'sInvestment

Alternative Parent's own financing, NO local Debt at all. No, it is less(F42) will be smaller than in case A (F24). The benefit of taxation is l

Operating Income(bt) (excludeInterests)

Operating Income(at)

Subsidiary

Funds Remitted toParent (Tax Credit)


8/21

Salvage Value

in Euro - Parent Perspective

Salvage Value

CF to Parent 4,895,280.00 6,784,560.00

PV of Parent's CF 4,079,400.00 4,711,500.00

35,000,000.00

Cumulative NPV 30,920,600.00 26,209,100.00

I never recover my working capital 100%. I sell it cheaper.

If the exchange rate depreciates, NPV decreases!

C.

Initial Parent'sInvestment

If NPV is still positive but a benchmark is low (!), e.g. 8%, I sfor all the risks and doubt the feasibility of the project (if I r

e ra e o oan s an ra e o re urn s , e oan wfor the project!!! Loan %-rate has a tax benefit. Taking loan ibeneficial because it will be deducted! It is better for the prloan.

,appreciation!

benefit.

SO: I should do different scenarios (simulate different exchaadding and not working capital back to the Parent).

Market devils: probabilities of sales = demand (-10% of the fmaterial price, labour costs, exchange rate, salvage value,borrowing, taxes . What do I base my forecasting/probabiliti

* Risks and Opportunities (!) should always be included dowspreadshit, and present different scenarios.

Discount rate is a probably return I expect. For discountingNot Net Income. The cost of MY money is the discount Rate (

majority of the money comes from the Subsidiary's country,local discount rate. But f the majority money comes from thshould take for calculations the expected Rate of Return.A strong exchange rate is always a positive scenario! A deprcurrency is a conservative scenario. A finance manager alwacalculations on forecast (and an account on the past).

From the Parent's perspective NPV would be more sensitive to exchmovements if the Parent invested more of its own funds, because Ncosts more of Euro, and thus at the end of each period the Parent wthan it could in case the exchange rate was in its favour. Exchange r

be higher! So I have zero-exchange rate exposure if all money is locexposed to no exchange rate risks. If I have a chance, I should alwa


9/21

D.

Reinvestment Rate 0.06 0.06

Amount Reinvested 510,000.00 1,260,600.00

rent Perspective

PV of Parent's CF

NPV

Delayed cash is always worse that cash today!

E.

p.479 of the Book in NZ$ =

F.

Proposed Sale Price 27,000,000.00

30,978,000.00

PV of a Parent's CF 25,815,000.00 4,860,000.00

815,000.00

###

If an exporter decides to produce locally, he should consider other C

Multiple Choice Questions

Q.9

Funds in GBP Correlation

Euro 500,000.00 0.63 0.08

0.30C$ 300,000.00 0.38 0.03

Total 800,000.00 1.00

Q.11

Funds Percentage Correlation Portfolio Stan

TWD 0.25 0.07

Funds are blocked until the Subsidiary is sold. NPV will be better thaworse than in case A.

ive

Subsidiary

Funds Remitted to

Parent (Tax Credit)

CF to Parent afterSalvage

Minimum / Break-even Salvage Value (SV) in Case A => (Funds

Remitted to Parent + SV)/(1+20%)3d degree = Cum.NPV after year2 => SV =

.too. But there are nonquanive factors: I can choose to take 27 mllnthat project. If I change discount rate (up to 30%), selling the projecmore attractive.

No, Wolverine should not divest the Subsidiary after one year sincecompared to that of at the end of year 3. Sale price is < that PV of al

CF to Parent afterSelling

NPV after Sellingafter one year

NPV after Salvageafter 3 years

Funds in %from Total

StandardDeviation

StandardDeviation


10/21

EGP 0.75 0.05 0.70 0.05


11/21

Year 3

24) is > 0.

60,000.00

530.00

31,800,000.00

40.00

2,400,000.00

6,000,000.00

2,800,000.00 in NZ $ - Subsi

5,000,000.00 PV of CF to Subsidiary 7,083,333.33

16,200,000.00 Initial Parent's Investment ###

15,600,000.00 Salvage Value

4,680,000.00 Cumulative NPV 42,916,666.67

10,920,000.00

15,920,000.00

15,920,000.00 we did not include loan in CF that's why we shoul

0.10 we care in case A about the burden of % of the lo

14,328,000.00

52,000,000.00

29,120,000.00 checking

0.56 break-even SV

37,143,680.00 30,473,280.00 8,023,680.00

21,495,185.19 17635000

0.20 enchmark

3,860,185.19 15.44% 0

18,400,000.00

12,880,000.00

17,880,000.00

16,092,000.00

feasible, NPVost.


12/21

70,000,000.00

39,200,000.00

48,211,520.00

27,900,185.19

Benchmark

1,691,085.19 4.83%

ould watch outally need it!)

e c eapers ususallyject to take the

ge rates,

orecast),rates ofs on?

the

e use CF (!)!) Id the

I should takeParent, I

ciatings bases his

nge rate$ appreciates,uld receive lessate exposure will

l. Local money iss take alocal loan.


13/21

38,190,600.00

34,371,540.00

48,368,062.40

27,990,776.85

2,990,776.85

22,449,600.00

40,088,571.43

25,794,222.22

30,654,222.22

Fs (lisencing, etc)

Portfolio Standard Deviation

0.05

in % =

5.44%

ard Deviation

in % =

n in case B but

ow and get rid oft now would be

PV will be lessll my future CFs.


14/21

5.13%


15/21

iary Perspective

8,333,333.33 9,212,962.96

###

34,583,333.33 ###

not ecxlude it now

n

14,912,592.59

not including working capital because it does not belongto Subsidiary, not from my own pocket


16/21


17/21


18/21


19/21

Problem 7 Year 0 Year 1 Year 2

Yes, Blore will be able to acquire Target for a price (C18) lower than its valuation of t

in MYR - Target's Perspective

1 Revenue 200,000,000.00 216,000,000.00

2 Cost of Goods sold (CGS) 100,000,000.00 108,000,000.00

3 Gross Profit

4 Additional Expenses (S&A) 30,000,000.00 30,000,000.00

5 Depreciation 20,000,000.00 20,000,000.00

6 50,000,000.00 58,000,000.00

7 32,500,000.00 37,700,000.00

8 Funds to reinvest 7,000,000.00 7,000,000.00

9 45,500,000.00 50,700,000.00

10 Salvage Value

11 Target's Stock Price 30.0012 Shares Outstanding 9,000,000.00

in GBP - Buyer's Perspective

13 Exchange Rate 0.25 0.25 0.25

14 Salvage Value

15 CF to Buyer 11,375,000.00 12,675,000.00

16 PV (Discount Rate 20%) 9,479,166.67 8,802,083.33

17 Cumulative NPV 9,479,166.67 18,281,250.00

18 Target's Market Value 67,500,000.00

19 0.0320 Max Premium in % 3.45%

Problem 11 Year 0 Year 1 Year 2

in Peruvian new sol - Target's Perspective

1 Initial Alaska's Outlay

2 CF of the Target 500,000,000.00 525,000,000.00 551,250,000.00

3 Salvage Value

in Pounds - Buyer's Perspective

4 Exchange Rate 0.19 0.19 0.185 Salvage Value 216,000,000.00

6 CF to Buyer 99,750,000.00 315,225,000.00

7 PV (Discount Rate 18%) 84,533,898.31 226,389,686.87

8 Initial Alaska's Outlay 190,000,000.00

9 Cumulative NPV 105,466,101.69

10 ### in Pounds

### in Peruvian new sol

0 0

(3-4-5)

Earnings after tax EAT(35%) = Net Income

Remitted by Target(100%)

Max Premium on Shares

affordable

(30MYR + 30MYR * Pr) * 9 mln. Sh

F17

1,000,000,000.00

0

8

Max Alaska's affordableOutlay


20/21

Year 3

e Target (F17). If Inflation assumed

233,280,000.00 yes

116,640,000.00 No Inflation assumed yes

30,000,000.00 yes

20,000,000.00

If we knew EBT at Year 0, we could use it as Target's earning potenti

43,316,000.00

7,000,000.00

300,000,000.00

0.25

75,000,000.00 yes

89,079,000.00 No withholding tax

51,550,347.22

Max value Buyer is ready to pay. It goes beyond the price with min P

0

Depreciation

66,640,000.00

56,316,000.00

69,831,597.22

res * 0,25 =


21/21

al (benchmark for buying)

remium of 10%! I would not buy it if Shareholders claim min Pr.

Documents

Exercises for Exam