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Chapter 5: Q2BP (page 681)
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?
4.3857 Polish zlotys are equal to 1 British pound
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What are the differences between a parallel loan and a fronting loan?
You are the vice president of finance for exploratory resources, headquartered in Houston, Texas. In January 20X1, your firm鈥檚 Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. \(0.8995/ Canadian dollars and the Canadian currency was selling at a discount in the forward market. The June 20X1 contract (face value = C\)150,000 per contract) was quoted at U.S. $0.8930/ Canadian dollar.
a. Explain how the Houston bank could lose on this transaction assuming no hedging.
b. If the bank does hedge with the forward contract, what is the maximum amount it can lose?
What allegations are sometimes made against foreign affiliates of multinational firms and against the multinational firms themselves?
Al Simpson helped start Excel Systems several years ago. At the time, he purchased116,000 shares of stock at \(1 per share. Now he has the opportunity to sell his interest in the company to Folsom Corp. for \)50 a share in cash. His capital gains tax rate would be 15 percent.
a. If he sells his interest, what will be the value for before-tax profit, taxes, and aftertax profit?
b. Assume, instead of cash, he accepts Folsom Corp. stock valued at \(50 per share. He pays no tax at that time. He holds the stock for five years and then sells it for \)82.50 (the stock pays no cash dividends). What will be the value for before-tax profit, taxes, and aftertax profit five years from now? His capital gains tax is once again 15 percent.
c. Using a 9 percent discount rate, calculate the aftertax profit. That is, discount back the answer in part b for five years and compare it to the answer in part a.
Chicago Savings Corp. is planning to make an offer for Ernie鈥檚 Bank & Trust. The stock of Ernie鈥檚 Bank & Trust is currently selling for \(44 a share.
a.If the tender offer is planned at a premium of 50 percent over market price, what will be the value offered per share for Ernie鈥檚 Bank & Trust?
b.Suppose before the offer is actually announced, the stock price of Ernie鈥檚 Bank & Trust goes to \)60 because of strong merger rumors. If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?
c.Because there is always the possibility that the merger could be called off after it is announced, you also want to consider your percentage loss if that happens. Assume you buy the stock at \(60 and it falls back to its original value after the merger cancellation, what will be your percentage loss?
d. If there is an 80 percent probability that the merger will go through when you buy the stock at \)60, and only a 20 percent chance that it will be called off, does this appear to be a good investment? Compute the expected value of the return on the investment.
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