Problem 31-1 on Exchange Rates based on Chapter 31 International Corporate Finance (Excel file included) You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur 1 year in the future. The spot exchange rate is S = $1.25/€ and the forward rate is F1 = $1.215/€. You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro discount rate is 7%. Problem 31-2 on Currency Appreciation based on Chapter 31 International Corporate Finance (Excel file included) Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in Cyprus and is expecting a C£4 million cash inflow in 1 year. The current spot rate is S = $1.80/C£ and the one-year forward rate is F1 = $1.8857/C£. a. What is the present value of Mia Caruso’s C£4 million inflow computed by first discounting the cash flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars? Problem 31-7 on Eurobonds versus Domestic Bonds based on Chapter 31 International Corporate Finance The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there. The risk-free interest rates on dollars and yen are r$ = 5% and r¥= 1%, respectively. Coval Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate. What is Coval Consulting’s after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost of debt in dollars and then find the yen equivalent.) Problem 31-12 on Credit & Exchange Rate Risk based on Chapter 31 International Corporate Finance Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest rate is 4.5%, what is the implied credit spread for Russian government bonds? Problem 30-9 on Forward Market Hedge based on Chapter 30 Risk Management (Excel file included) You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in 1 year, you will deliver 4000 kg of frozen king crab for 100,000 euros. Your cost for obtaining the king crab is $110,000. All cash flows occur in exactly 1 year. a. Plot your profits in 1 year from the contract as a function of the exchange rate in 1 year for exchange rates from $0.75/€ to $1.50/€. Label this line Unhedged Profits.
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