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A German company manufactures a specialized piece of manufacturing equipment and leases it to a U.K. enterprise. The lease calls for five end-of-year payments of £1 million. The German firm spent €3.5 million to produce the equipment, which is expected to have no salvage value after five years.
The current spot rate is €1.5/£. The risk-free interest rate in Germany is 3 percent, and in the United Kingdom it is 5 percent. The German firm reasons that the appropriate (German) discount rate for this investment is 7 percent. Calculate the NPV of this investment in two ways.
a. First, convert all cash flows to pounds, and discount at an appropriate (U.K.) cost of capital. Convert the resulting NPV to euros at the spot rate.
b. Second, calculate forward rates for each year, convert the pound- denominated cash flows into euros using those rates, and discount at the German cost of capital. Verify that the NPV obtained from this approach matches (except perhaps for small rounding errors) that obtained in part (a).
Let US$4=MX$15. If inflation in the US goes up by 4%, and inflation in Mexico goes up by 6%, what do we expect the exchange rate to be in the next period? Assume purchasing power parity holds. Show all work.
At a Discount Rate of 9.5%, a plot of land that promises to generate a cash flow of $ 12,000 per year forever Is worth:
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A significant advantage of a RESIDUAL DIVIDEND POLICY is the priority put on funding positive NPV projects; this advantage, however, might come at the expense of the CLIENTELE effect, at least in the short run.
Duke Energy has recently issued a bond with the following characteristics: maturity: 20 years, coupon rate: 8% (paid semi-annually), face value: $1000. Your investment advisor has told you that the yield-to-maturity on this bond is 7.5%. What should ..
Suppose the average return on an asset is 11.5 percent and the standard deviation is 20 percent. Further assume that the returns are normally distributed. Use the NORMDIST function in Excel to determine the probability that in any given year you will..
The Cherished Cat's cost of equity is 14.6 percent and its pre-tax cost of debt is 8.7 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.65 and the tax rate is 28 percent?
XYZ Inc has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 9%. The company's weighted average cost of capital is 1..
A bakery invests $34,000 in a light delivery truck. This was depreciated using the 5 years MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000. What would be the after-tax cash flow from sale of this ass..
xyz has no debt financing and has a value of 45 million and ebit of 14.5 million. the firm is planning to change its
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