FIN 516 (Advanced Managerial Finance) Entire Course
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c) What is Kohwe’s share price today if the investment is financed with debt?<br />
Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due<br />
to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe’s<br />
future free cash flows is still 8%.<br />
e) What is Kohwe’s share price today given the financial distress costs of leverage?<br />
<strong>FIN</strong> <strong>516</strong> Week 7 Homework<br />
Problem 31-1 on Exchange Rates Based on Chapter 31 International Corporate <strong>Finance</strong><br />
(Excel file included)<br />
You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will<br />
occur 1 year in the future. The spot exchange rate is S = $1.25/€ and the forward rate is F1 = $1.215/€.<br />
You estimate that the appropriate dollar discount rate for this cash flow is 4% and the appropriate euro<br />
discount rate is 7%.<br />
a) What is the present value of the €5 million cash inflow computed by first discounting the euro and then<br />
converting it into dollars?<br />
b) What is the present value of the €5 million cash inflow computed by first converting the cash flow into<br />
dollars and then discounting?<br />
c) What can you conclude about whether these markets are internationally integrated, based on your<br />
answers to parts a) and b)?<br />
Problem 31-2 on Currency Appreciation Based on Chapter 31 International Corporate <strong>Finance</strong><br />
(Excel file included)<br />
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in Cyprus and is<br />
expecting a C£4 million cash inflow in 1 year. The current spot rate is S = $1.80/C£ and the 1-year<br />
forward rate is F1 = $1.8857/C£.<br />
a) What is the present value of Mia Caruso’s C£4 million inflow computed by first discounting the cash<br />
flow at the appropriate Cypriot pound discount rate of 5%, and then converting the result into dollars?<br />
b) What is the present value of Mia Caruso’s C£4 million inflow computed by first converting the cash flow<br />
into dollars, and then discounting at the appropriate dollar discount rate of 10%?<br />
c) What can you conclude about whether these markets are internationally integrated, based on your<br />
answers to parts a) and b)?<br />
Problem 31-7 on Eurobonds Versus Domestic Bonds Based on Chapter 31 International Corporate<br />
<strong>Finance</strong><br />
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of<br />
30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt<br />
because they are considering launching a new bond issue in Tokyo to raise money for a new investment<br />
there.<br />
The risk-free interest rates on dollars and yen are r$ = 5% and r¥ = 1%, respectively. Coval Consulting is<br />
willing to assume that capital markets are internationally integrated and that its free cash flows are<br />
uncorrelated with the yen-dollar spot rate.<br />
What is Coval Consulting’s after-tax cost of debt in yen? (Hint: Start by finding the after-tax cost of debt in<br />
dollars and then find the yen equivalent.)<br />
Problem 31-12 on Credit and Exchange Rate Risk Based on Chapter 31 International Corporate <strong>Finance</strong><br />
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles<br />
per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest rate<br />
is 4.5%, what is the implied credit spread for Russian government bonds?<br />
Problem 30-9 on Forward Market Hedge Based on Chapter 30 Risk Management
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