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Dynasty Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $5 million. It will reinvest all the earnings in the unit. It expects that at the end of 8 years, it will sell the unit for 12,300,000 euros after capital gains taxes are paid. The spot rate of the euro is $1.20 and is used as the forecast of the euro in the future years. The annualized U.S. risk-free interest rate is 0.05 regardless of the maturity of the debt, and the annualized risk-free interest rate on euros is 0.05, regardless of the maturity of debt. Assume that interest rate parity exists. Dynasty's cost of capital is 20%.
Dynasty could partially finance the acquisition. It could obtain a loan of 3 million euros today that would be used to cover a portion of the acquisition. In this case, it would have to pay back a lump sum total of 7 million euros at the end of 8 years to repay the loan. There are no interest payments on this debt. The way in which this financing deal is structured, none of the payment is tax-deductible. Determine the NPV if Cantoon uses the forward rate instead of the spot rate to forecast the future spot rate of the euro, and elects to partially finance the acquisition. [You need to derive the 8-year forward rate for this specific question.]
Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,250 monthly. The contract currently sells for $110,000. What is the monthly return on this investment vehicle? What is the effective annual return?
International Fisher Effect. If a U.S. firm believes that the international Fisher effect holds, what are the implications regarding a strategy of continually attempting to generate high returns from investing in currencies with high interest rates?
Suppose you are working with two factor portfolios, portfolio 1 and portfolio2. The portfolios hace expected returns of 12% and 9%, respectively. Based on this information, what would be the expected return on well-diversified portfolio A, if A has a..
You just paid $354,000 for a policy that will pay you and your heirs $12,600 a year forever. What rate of return are you earning on this policy?
A fast growing firm recently paid a dividend of $1.00 per share. The dividend is expected to increase at a rate of 15 percent rate for the next 3 years. Afterwards, a more stable 6 percent growth rate can be assumed. If a 10 percent discount rate is ..
Rose, Inc., has current assets of $7,300, net ?xed assets of $26,200, current liabilities of $5,700, and long-term debt of $12,900. What is the value of the shareholders’ equity account for this ?rm? How much is net working capital?
The opportunity costs the firm incurs by maintaining current assets are called ____________ and they usually rise with the level of investment in current assets.
Oil Company may calculate depreciation using the “units of production” method of depreciation. Consider a depreciable asset costing $100,000 that is expected to have a useful life of 120,000 units. Salvage value is estimated to be $20,000. Estimated ..
One year ago, the Jenkins Family Fun Center deposited $4,800 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $6,600 to this account. They plan on making a final deposit of $8,800 ..
Company X wants to borrow $10,000,000 floating for 5 years; company Y wants to borrow $10,000,000 fixed for 5 years. Their external borrowing opportunities are as follows.
An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $8,500,000 and will be sold for $1,890,000 at the end of the project. If the tax rate is 30 percent, what is ..
We are evaluating a project that costs $744,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 45,000 units per year. Price per unit is $60, varia..
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