1. Assume that PBG Corporation is considering the establishment of a subsidiary in Norway. The initial investment required by the parent is $4,300,000. If the project is undertaken, PBG would terminate the project after four years. PBG’ cost of capital is 13%, and the project is of the same risk as PBG’s existing projects. All cash flows generated from the project will be remitted to the parent at the end of each year. Listed below are the estimated cash flows the Norwegian subsidiary will generate over the project’s lifetime in Norwegian kroner (NOK):
Year 1 Year 2 Year 3 Year 4
NOK9,300,000 NOK14,700,000 NOK15,100,000 NOK18,900,000
The current exchange rate of the Norwegian kroner is $.135. PBG’s exchange rate forecast for the Norwegian kroner over the project’s lifetime is listed below:
Year 1 Year 2 Year 3 Year 4
$.13 $.14 $.12 $.15
What is the net present value of the Norwegian project?
2. Izzy Inc., a U.S.-based MNC, has screened several targets. Based on economic and political considerations, only one eligible target remains in Malaysia. Izzy would like you to value this target and has provided you with the following information:
• Izzy expects to keep the target for three years, at which time it expects to sell the firm for 500 million Malaysian ringgit (MYR) after deducting the amount for any taxes paid.
• Izzy expects a strong Malaysian economy. Consequently, the estimates for revenues for the next year are MYR300 million. Revenues are expected to increase by 11% over the following two years.
• Cost of goods sold are expected to be 50% of revenues.
• Selling and administrative expenses are expected to be MYR40 million in each of the next three years.
• The Malaysian tax rate on the target’s earnings is expected to be 32%.
• Depreciation expenses are expected to be MYR15 million per year for each of the next three years.
• The target will need MYR9 million in cash each year to support existing operations.
• The target’s current stock price is MYR35 per share. The target has 9,200,000 million shares outstanding.
• Any cash flows remaining after taxes are remitted by the target to Izzy, Inc. Izzy uses the prevailing exchange rate of the Malaysian ringgit as the expected exchange rate for the next three years. This exchange rate is currently $0.23.
• Izzy’s required rate of return on similar projects is 13%.
The Malaysian target’s value based on its stock price is $___
3. Assume the following information for XYZ Co., a U.S.-based MNC that is considering obtaining funding for a project in Germany:
U.S. risk-free rate = .04
German risk-free rate = .06
Risk premium on dollar-denominated debt provided by U.S. creditors = 0.04
Risk premium on euro-denominated debt provided by German creditors = .04
Beta of project = 1.2
Expected U.S. market return = .10
U.S. corporate tax rate = 0.21
German corporate tax rate = .40
What is XYZ’s cost of dollar-denominated debt?
4. The British Pound is equal to $1.83 and the Brazilian Real is equal to $0.27. The value of the British Pound in Brazilian Real is:
5.) BBC Bank believes the Canadian dollar will depreciate over the next 3 days from $1.33 to $1.03. The following annual interest rates apply:
Currency Lending Rate Borrowing Rate
Canadian Dollars (C$) .0520 .0580
Dollars 0.064 .0595
XYZ Bank has the capacity to borrow either Canadian $100,200,000 or US $75,000,000. If XYZ Bank’s forecast if correct, what will its dollar profit be from speculation over the week (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?
6. Assume that interest rate parity holds. The U.S. five year interest rate is 0.06 annualized, and the Mexican five year interest rate is 0.04 annualized. Today’s spot rate of the Mexican peso is $0.23. What is the approximate 10 year forecast of the peso’s spot rate if the 10 year forward rate is used as a forecast?