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Chapter 5: Q.8 (page 648)
How is goodwill now treated in a merger?
Goodwill is recorded as the intangible asset in the balance sheet of the purchasing company.
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Worldwide Scientific Equipment is considering a cash acquisition of Medical Labs for \(1.6 million. Medical Labs will provide the following pattern of cash inflows and synergistic benefits for the next 25 years. There is no tax loss carryforward.
Years 1鈥�5 6鈥�15 16鈥�25 Cash inflow (aftertax) ...................... \)150,000 \(170,000 \)210,000 Synergistic benefits (aftertax) ......... 20,000 30,000 50,000
The cost of capital for the acquiring firm is 11 percent. Compute the net present value. Should the merger be undertaken?
The Clark Corporation desires to expand. It is considering a cash purchase of Kent Enterprises for \(3 million. Kent has a \)700,000 tax loss carryforward that could be used immediately by the Clark Corporation, which is paying taxes at the rate of 30 percent. Kent will provide $420,000 per year in cash flow (aftertax income plus depreciation) for the next 20 years. If the Clark Corporation has a cost of capital of 13 percent, should the merger be undertaken?
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?
From the base price level of 100 in 1981, Saudi Arabian and U.S. price levels in 2010 stood at 250 and 100, respectively. Assume the 1981 \(/ riyal exchange rate was \)0.46/riyal. suggestion: using the purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of f0.46. what would the exchange rate be in 2010?
List the factors that affect the value of a currency in foreign exchange markets.
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