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Ch. 21: Questions 4 & 7 (Questions and Problems section)
4. Using Spot and Forward Exchange Rates [LO1] Suppose the spot
exchange rate for the Canadian dollar is Can$1.09 and the six-month
forward rate is Can$1.11.
a. Which is worth more, a U.S. dollar or a Canadian dollar?
b. Assuming absolute PPP holds, what is the cost in the United States
of an Elkhead beer if the price in Canada is Can$2.50? Why might the
beer actually sell at a different price in the United States?
c. Is the U.S. dollar selling at a premium or a discount relative to the
Canadian dollar?
d. Which currency is expected to appreciate in value?
e. Which country do you think has higher interest rates—the United
States or Canada? Explain.
7. Interest Rates and Arbitrage [LO2] The treasurer of a major U.S.
firm has $30 million to invest for three months. The interest rate in the
United States is .31 percent per month. The interest rate in Great Britain
is .34 percent per month. The spot exchange rate is £.573, and the three-
month forward rate is £.575. Ignoring transaction costs, in which country
would the treasurer want to invest the company’s funds? Why?
Ch. 26: Questions 1 & 2 (Questions and Problems section):
1. Calculating Synergy [LO3] Pearl, Inc., has offered $357 million cash
for all of the common stock in Jam Corporation. Based on recent market
information, Jam is worth $319 million as an independent operation. If
the merger makes economic sense for Pearl, what is the minimum
estimated value of the synergistic benefits from the merger?
2. Balance Sheets for Mergers [LO2] Consider the following premerger
information about Firm X and Firm Y:
Assume that Firm X acquires Firm Y by paying cash for all the shares
outstanding at a merger premium of $6 per share. Assuming that neither