Mia Caruso Enterprises, a U. S. manufacturer of children’ s toys, has made a sale in Cyprus and is expecting a C £ 4 million cash inflow in 1 year. The current spot rate is S = $ 1.80 / C £ and the 1-year forward rate is F1 = $ 1.8857 / C £.
a) What is the present value of Mia Caruso’ s C £ 4 million inflow computed by first discounting the cash flow at the appropriate Cypriot pound discount rate of 5 %, and then converting the result into dollars?
b) What is the present value of Mia Caruso’ s C £ 4 million inflow computed by first converting the cash flow into dollars, and then discounting at the appropriate dollar discount rate of 10 %?
c) What can you conclude about whether these markets are internationally integrated, based on your answers to parts a) and b)?
Problem 31-7 on Eurobonds Versus Domestic Bonds Based on Chapter 31 International Corporate Finance
The dollar cost of debt for Coval Consulting, a U. S. research firm, is 7.5 %. The firm faces a tax rate of 30 % on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there.
The risk-free interest rates on dollars and yen are r $ = 5 % and r ¥ = 1 %, respectively. Coval Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the yen-dollar spot rate.
What is Coval Consulting’ s after-tax cost of debt in yen?( Hint: Start by finding the after-tax cost of debt in dollars and then find the yen equivalent.)
Problem 31-12 on Credit and Exchange Rate Risk Based on Chapter 31 International Corporate Finance
Suppose the interest on Russian government bonds is 7.5 %, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U. S. risk-free interest rate is 4.5 %, what is the implied credit spread for Russian government bonds?
Problem 30-9 on Forward Market Hedge Based on Chapter 30 Risk Management
You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in 1 year, you will