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A Brazilian refinery exported many tons of sugar to the U.S. and hence its profitability relies on a low exchange rate of U.S. dollars per Brazilian real (currently US$0.3315/R$). The risk manager is concerned that an exchange rate above US$0.3600/R$ would impair the company’s ability to make next year’s debt payments. The following option quotes are available to the company (OTC):
Option Strike Price Premium
December Call on real $0.3400/R$ $0.0045/R$
December Put on real $0.3400/R$ $0.0132/R$
Explain why buying the call option above can help hedge the exchange rate risk of the company? ?
Suppose the contract size is R$10,000,000, what is the profit or loss from buying this call if the spot rate in December is US$0.3500/R$? ?
Then calculate the debt ratio of a service-oriented company, such as Cognizant Technology Solutions. Based on what you learned about leverage in this chapter, what would account for the difference in their debt ratios?
In-The-Dell Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent. What is the pretax cost of debt? What is the aftertax cost of debt? Which is m..
Box plc is considering the acquisition of Circle plc. The former is valued at £100m and the latter at £50m by the market. What is the present value of the gain form the merger? If a cash offer of £70m is accepted by Circle's shareholders what is the ..
You are given the following financial data for Company A: Cash = $6,000; inventories = $1,000; accounts receivable = $700; other current assets = $500; long-term assets = $1,000; accounts payable = $800; other current liabilities = $4000; net income ..
Sam Sharp purchased 100 shares of Electric Lighting Inc. (ELI) one year ago for $60 per share, and he also received dividends of $5 per share since then. Now that ELI's stock price has increased to $64.6, Sam has decided to sell his holdings. What is..
State why Walmart is a competitor of Target. Identify the reason that financial ratios and common-size financial statements are more important when contrasting the financial performance of Target to Walmart than the financial amounts reported on the ..
Caballos, Inc., has a debt to capital ratio of 48%, a beta of 1.13 and a pre-tax cost of debt of 6.9%. The firm had earnings before interest and taxes of $ 636 million for the last fiscal year, after depreciation charges of $ 216 million. Assume that..
The table below shows your stock positions at the beginning of the year, the dividends that each stock paid during the year, and the stock prices at the end of the year.
Suppose you will need $50,000 in 4 years to start up a new business you have planned. With a 5% real interest rate, how much do you have to invest now in order to achieve this goal? Repeat Problem #3, but assume you can contribute an equal amount on ..
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer, purchased just 2 years ago, is being depreciated on a straight-line basis and has 6 years of remaining life. Its curren..
what is an ipo? how does an ipo allow an organization to grow financially? when is a merger or an acquisition instead
Consider the following sequence of prices for a currency futures contract. Each contact involves 10,000 units of the foreign currency. The initial and maintenance margin requirements are USD 800 and USD 500, respectively.
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