Extend the previous example of XYZ and DYA. DYA ’ s owners are ask ing € 800,000 for the business. The time-0 actual spot FX rate is 1.80 $/ € , whereas the time-0 intrinsic spot FX rate is 1.50 $/ € . XYZ ’ s managers believe that the current misvaluation of the euro will [latex]\underline{not}[/latex] be fully corrected when the time-1 cash fl ow arrives. Instead, man agers forecast a time-1 spot FX rate of 1.65 $/ € . (a) Find the NPV in euros of the proposed acquisition. (b) Find the NPV in U.S. dollars of the proposed acquisition.

(a) The acquisition ’ s [latex]NPV^€[/latex] is the same as before, € 903,200 – 800,000 = € 103,200. (b) The expected time-1 operating cash fl ow in U.S. dollars is 1.65 $/ € ( € 1 million) = $1.65 million. Of this expected cash fl ow, there is a $1.47 million component based on the expected time-1 intrinsic spot FX rate, and a $0.18 million component that is a forecasted windfall FX gain. Because the currency beta of the euro is 0.20, the discount rate for the FX windfall component is 3% + 0.20(5%) = 4%, using the global CAPM. [latex]{V_B}^\$[/latex] is thus $1.47 million/1.085 + 0.18 million/1.04 = $1.355 mil lion + 0.173 million = $1.528 million. Because [latex]I^\$[/latex] is (1.80 $/ € )( € 800,000) = $1.44 million, [latex]NPV^\$[/latex] = $1.528 million – 1.44 million = $0.088 million.

Question 8.4: Extend the previous example of XYZ and DYA. DYA’s owners are...

Applied International Finance Managing Foreign Exchange Risk and International Capital Budgeting

Extend the previous example of XYZ and DYA. DYA’s owners are asking €800,000 for the business. The time-0 actual spot FX rate is 1.80 $/€, whereas the time-0 intrinsic spot FX rate is 1.50 $/€. XYZ’s managers believe that the current misvaluation of the euro will $\underline{not}$ be fully corrected when the time-1 cash flow arrives. Instead, managers forecast a time-1 spot FX rate of 1.65 $/€. (a) Find the NPV in euros of the proposed acquisition. (b) Find the NPV in U.S. dollars of the proposed acquisition.

The "Step-by-Step Explanation" refers to a detailed and sequential breakdown of the solution or reasoning behind the answer. This comprehensive explanation walks through each step of the answer, offering you clarity and understanding.
Our explanations are based on the best information we have, but they may not always be right or fit every situation.

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

This Question has been Answered.