Applied International Finance Managing Foreign Exchange Risk and International Capital Budgeting by Thomas J. O’Brien | 9781606497340 | 1606497340

Corporate Finance

Applied International Finance Managing Foreign Exchange Risk and International Capital Budgeting

188 SOLVED PROBLEMS

Question: 8.6

The Eurozone firm DYA will generate uncertain future operating cash flows in euros for 5 years, expected to be €1 million per year. XYZ Company, a U.S. firm, is considering the acquisition of DYA. XYZ estimates that from the U.S. dollar perspective, DYA’s FX operating exposure to the euro is 1.50 ...

Verified Answer:

(a)

E^*(x^{\$/€}) = 3\% – 6\% + 0.20(5\%) = ...

Question: 8.5

The Eurozone firm DYA expects €1 million per year in operating cash flow for 5 years. XYZ Company, a U.S. firm, is considering acquiring DYA. XYZ estimates that in U.S. dollars, DYA’s FX operating exposure to the euro is 1 and the cost of capital is 8.50%. Assume r_f^$=3% and r_f^$=6%, the currency ...

Verified Answer:

(a)

[E^*(x^{\$/€}) = 3\% – 6\% + 0.20(5\%) ...

Question: 8.4

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 not be fully corrected when the ...

Verified Answer:

(a) The acquisition’s

NPV^€

is the ...

Question: 8.3

Extend the previous XYZ/DYA example. DYA’s owners are asking €800,000 for the business. Assume the time-0 actual spot FX rate is 1.80 $/€ and the time-0 intrinsic spot FX rate is 1.50 $/€. XYZ believes that the temporary overvaluation of the euro will be corrected before the time-1 cash flow ...

Verified Answer:

NPV^€ = €903,200 – 800,000 = €103,200. \ I^...

Question: 8.2

The Eurozone firm DYA will generate one operating cash flow, expected to be €1 million at time 1. From the perspective of U.S. dollars, DYA’s FX operating exposure to the euro is 1 and cost of capital is 8.50%. XYZ Company, a U.S. multinational, is evaluating the acquisition of DYA. Assume r_f^$ ...

Verified Answer:

(a)

E^*(x^{\$/€}) = 3\% - 6\% + 0.20(5\%) =...

Question: 8.1

A U.S. multinational’s Japanese division has an FX operating exposure to the yen of 1.60 and a hurdle rate in U.S. dollars of 9%. The risk-free rates are 5% in U.S. dollars and 2% in yen, and the volatility of the yen is 0.08. Assume the linear approximation RA-UIRP condition (global CAPM) in U.S. ...

Verified Answer:

(a) Using equation (5.3):

E^*(x^{\$/¥}) = {...

Question: 8.P.12

The British firm LVI will generate uncertain future operating cash flows in British pounds for 5 years, expected to be £1 million per year. XYZ Co. is a U.S. firm considering the acquisition of LVI. XYZ estimates that from the U.S. dollar perspective, LVI’s FX operating exposure to the British ...

Verified Answer:

(a)

E^*(x^{\$/£}) = 3\% – 5\% + 0.30(5\%) =...

Question: 8.P.11

TXZ’s owners will sell the company to LMP for £900,000. (a) For LMP, what is the acquisition’s NPV in British pounds? (b) What is the acquisition’s NPV in U.S. dollars? ...

Verified Answer:

(a) £921,000 – 900,000 = £21,000.(b) $1,473,000 – ...

Question: 8.P.10

LMP’s managers forecast that the time-1 spot FX rate will be the intrinsic spot FX rate. (a) What is TXZ’s intrinsic business value in British pounds? (b) What is TXZ’s intrinsic business value in U.S. dollars? ...

Verified Answer:

(a)

E^*(x^{\$/£}) = 3.5\% – 4\% + 0.30(5\%)...

Question: 8.P.9

The British firm LVI expects operating cash flows for 5 years of £1 million per year. XYZ Co., a U.S. firm, is considering the acquisition of LVI. XYZ estimates that from the U.S. dollar perspective, LVI’s FX operating exposure to the British pound is 1 and the cost of capital is 9.50%. Assume ...

Verified Answer:

(a)

E^*(x^{\$/£}) = 3\% – 5\% + 0.30(5\%) = ...