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1. Suppose that the nominal risk-free rate of return in the U.S is 8% and inflation is expected to be at 7%. In Australia the nominal interest rate is 14%. What is the expected rate of inflation in Australia if the Fisher Effect holds?
a. 7.33%
b. 1.09%
c. 12.94%
d. 3.53%
2. Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as:
A) Net Income + Depreciation
B) (Sales - Costs) x (1-tax rate)
C) EBIT - Depreciation + Taxes
D) EBIT - Taxes
E) EBIT x (1-Tax Rate) + Depreciation x Tax Rate
Describe how Bach could use a straddle to hedge its possible positions in dirham. Consider three scenarios. In the first scenario, the dirham's spot rate at option expiration is equal to the exercise price of 0.98 euro.
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Fama's Llamas has a weighted average cost of capital of 9.8 percent. The company's cost of equity is 12 percent, and its pretax cost of debt is 7.8 percent. The tax rate is 40 percent. What is the company's target debt-equity ratio?
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