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Assume the interest rate is 16% on pounds sterling and 7% on the Euro. At the same time, inflation is running at an annual rate of 3% in Germany and 9% in England.
a.If the Euro is selling at a one-year forward premium of 10% against the pound, is there an arbitrage opportunity? Explain.
b.What is the real interest rate in Germany? In England?
c.Suppose that during the year the exchange rate changes from Euro 2.7/£1 to Euro 2.65/£1. What are the real costs to a German company of borrowing pounds? Contrast this cost to its real cost of borrowing Euro.
d.What are the real costs to a British firm of borrowing Euro? Contrast this cost to its real cost of borrowing pounds.
Executive Chalk is financed solely by common stock and has outstanding twenty-five million shares with a market price of $10 a share. It now declared that it intends to issue $160 million of debt and to use the proceeds to buy back common stock.
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Strickler technology is thinking changes in its working capital policies to improve its cash flow cycle. Strickler's sales last year $3,250,000 (all on credit), & its net profit margin was 7 percent.
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a leader in your firm has been studying the foreign exchange market for a number of years and believes that she can
What is the maximum possible gain?
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