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Chapter 5: Q14DQ (page 680)

What is the danger or concern in floating a Eurobond issue?

Short Answer

Expert verified

The danger related to the issue of Eurobond is foreign exchange risk as the bond is issued in a different currency. To lessen the risk the decision for the currency selection should be taken with proper study and analysis.

Step by step solution

01

Eurobond

All the bonds that are issued by the business entity in the current which is not the same as the local currency of the business entity are known as Eurobonds.

02

Danger or concern in floating a Eurobond issue

Eurobonds are issued in a currency different from that of the country. This increases the chances of foreign exchange risk as well as currency risk like translation exposure.

The decision for the currency selection for denominating Eurobond issues must be made with proper analysis and foresight. Issuing the Eurobonds in the denomination of multicurrency units lessens the effect of foreign exchange risk.

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Most popular questions from this chapter

Suppose a polish zloty is selling for $0.3414 and a British pound is selling for 1.4973. what is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a British pound?

General Meters is considering two mergers. The first is with Firm A in its own

volatile industry, the auto speedometer industry, while the second is a merger

with Firm B in an industry that moves in the opposite direction (and will tend to

level out performance due to negative correlation).

General Meters Merger

with Firm A

General Meters Merger

with Firm B

Possible

Earnings

(\( in millions) Probability

Possible

Earnings

(\) in millions) Probability

\(40 ........... 0.30 \)40 ........... 0.25

60 ........... 0.40 60 ........... 0.50

80 ........... 0.30 80 ........... 0.25

aCompute the mean, standard deviation, and coefficient of variation for both

investments (refer to Chapter 13 if necessary).

b.Assuming investors are risk-averse, which alternative can be expected to

bring the higher valuation?

How is goodwill now treated in a merger?

Assume the Knight Corporation is considering the acquisition of Day Inc. The expected earnings per share for the Knight Corporation will be \(4.00 with or without the merger. However, the standard deviation of the earnings will go from \)2.40 to $1.60 with the merger because the two firms are negatively correlated.

a.Compute the coefficient of variation for the Knight Corporation before and after the merger (consult Chapter 13 to review statistical concepts if necessary).

b.Discuss the possible impact on Knight鈥檚 postmerger P/E ratio, assuming investors are risk-averse.

What is the difference between a merger and a consolidation?
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