1) tiger towers, inc. is considering an expansion of their existing business, student
apartments. the new project will be built on some vacant land that the firm has just
contracted to buy. the land cost $1,000,000 and the payment is due today. construction
of a 20-unit office building will cost $3 million; this expense will be depreciated
straight-line over 30 years to zero salvage value; the pretax value of the land and
building in year 30 will be $18,000,000. the $3,000,000 construction cost is to be paid
today. the project will not change the risk level of the firm. the firm will lease 20 offices
suites at $20,000 per suite per year; payment is due at the start of the year; occupancy
will begin in one year. variable cost is $3,500 per suite. fixed costs, excluding
depreciation, are $75,000 per year. the project will require a $10,000 investment in net
working capital.
what is the unlevered after-tax incremental cash flow for year 0?
a.-$3,660,000
b.-$5,100,000
c.-$4,000,000
d.-$4,010,000
e.none of the above
2) suppose the quote for a five-year swap with semiannual payments is 8.508.60 percent
in dollars and 6.606.80 percent in euro against six-month dollar libor. the means
a.the swap bank will enter into a currency swap in which it would pay semiannual
fixed-rate dollar payments of 8.50 percent against receiving semiannual fixed-rate euro
payments of 6.80
b.the swap bank will enter into a currency swap in which it would pay semiannual
fixed-rate euro payments of 6.60 percent against receiving semiannual fixed-rate dollar
payments of 8.60
c.both a and b
d.none of the above
3) which equation is used to define the futures price?
a.
b.
c.
d.
e.
4) solve for the weighted average cost of capital:
a.8.67%
b.8.00%
c.7.60%
d.7.33%
e.7.14%
5) american call and put premiums
a.should be at least as large as their intrinsic value
b.should be at no larger than their moneyness
c.should be exactly equal to their time value
d.should be no larger than their speculative value
6)
the 5-year project requires equipment that costs $100,000. if undertaken, the
shareholders will contribute $20,000 cash and borrow $80,000 at 6% with an
interest-only loan with a maturity of 5 years and annual interest payments. the
equipment will be depreciated straight-line to zero over the 5-year life of the project.
there will be a pre-tax salvage value of $5,000. there are no other start-up costs at year
0. during years 1 through 5, the firm will sell 25,000 units of product at $5; variable
costs are $3; there are no fixed costs.
what is the npv of the project using the wacc methodology?
a.$49,613.03
b.$58,028.68
c.$102s,727.55
d.$315,666.16
e.none of the above
7) the smaller the concentration percentage,
a.the more concentrated a market is in a few stock issues
b.the less concentrated a market is
c.the more liquid the secondary stock market is
d.none of the above
8) examples of control risk include
a.the unexpected imposition of capital controls, inbound or outbound, and withholding
taxes on dividend and interest payments
b.unexpected changes in environmental policies, sourcing/local content requirements,
minimum wage law, and restriction on access to local credit facilities
c.restrictions imposed on the maximum ownership share by foreigners, mandatory
transfer of ownership to local firms over a certain period of time (fade-out
requirements), and the nationalization of local operations of mncs
d.none of the above
9) the dollar-euro exchange rate is $1.25 = 1.00 and the dollar-yen exchange rate is
¥100 = $1.00. what is the euro-yen cross rate?
a.¥125 = 1.00
b.¥1.00 = 125
c.¥1.00 = 0.80
d.none of the above
10) which type of trading system is desirable for actively traded issues?
a.continuous trading systems
b.call trading systems
c.crowd trading systems
d.none of the above
11) the underlying principle of the current/noncurrent method is
a.assets and liabilities should be translated based on their maturity
b.monetary balance sheet accounts should be translated at the spot rate; nonmonetary
accounts are translated at the historical rate in effect when the account was first
recorded
c.monetary accounts are translated at the current exchange rate; other accounts are
translated at the current exchange rate if they are carried on the books at current value;
items carried at historical cost are translated at historic exchange rates
d.all balance sheet accounts are translated at the current exchange rate, except
stockholder equity
12) under the theory of comparative advantage, liberalization of international trade will
a.enhance the welfare of the world’s citizens
b.create unemployment and displacement of workers permanently
c.result in higher prices in the long run as monopolist are able to charge higher prices
after eliminating their competitors
d.all of the above
13) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
if the call finishes out-of-the-money what is your portfolio cash flow?
14) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
the irp 1-year and 2-year forward exchange rates are
explain how this opportunity affects which swap firm b will be willing to participate in.
15) calculate the euro-based return an italian investor would have realized by investing
10,000 into a £50 british stock. one year after investment, the stock pays a £1 dividend,
and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound,
although he sold £8,800 forward at the forward rate of 1.28 per pound.
16)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
there is (at least) one profitable arbitrage at these prices. what is it?
17)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward exchange rate
in $ per that that satisfies irp from the perspective of a customer who borrowed 1m,
traded for dollars at the spot rate and invested at i$ = 2%.
18) the time from acceptance to maturity on a $50,000 banker’s acceptance is 180 days.
the importing bank’s acceptance commission is 2.50 percent and that the market rate for
180-day b/as is 2 percent.
determine the bond equivalent yield the importer’s bank will earn from discounting the
b/a with the exporter.
19) consider an option to buy £10,000 for 12,500. in the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the
dollar by ten percent. on the other hand, the euro could depreciate against the pound by
20 percent.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
if the call finishes out-of-the-money what is your replicating portfolio cash flow?
20) suppose that you hold a piece of land in the city of london that you may want to sell
in one year. as a u.s. resident, you are concerned with the dollar value of the land.
assume that if the british economy booms in the future, the land will be worth £2,000,
and one british pound will be worth $1.80. if the british economy slows down, on the
other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say,
$2.20/£. you feel that the british economy will experience a boom with a 60 percent
probability and a slowdown with a 40 percent probability.
estimate your exposure (b) to the exchange risk.
