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CHAPTER 31 - Answer
CHAPTER 31 - Answer
CHAPTER 31 - Answer
CHAPTER 31
INTERNATIONAL ASPECTS
OF CORPORATE FINANCE
I. Questions
1. The U.S. dollar. The primary reason why the dollar was used is that it
provided a relatively stable benchmark, and it was accepted universally
for transaction purposes.
2. Under the fixed exchange rate system, the fluctuations were limited to
+1% and 1%. Under the floating exchange rate system, there are no
agreed-upon limits.
3. A dollar will buy more French francs.
4. There will be an excess supply of dollars in the foreign exchange
markets, and thus, will tend to drive down the value of the dollar. Foreign
investments in the United States will increase.
5. Taking into account differential labor costs abroad, transportation, tax
advantages, and so forth, Philippine corporations can maximize long-run
profits. There are also nonprofit behavioral and strategic considerations,
such as maximizing market share and enhancing the prestige of corporate
officers.
6. The foreign projects cash flows have to be converted to local currency,
since the shareholders of the Philippine corporation (assuming they are
mainly Philippine residents) are interested in peso returns. This subjects
them to exchange rate risk, and therefore requires an additional risk
premium. There is also a risk premium for political risk (mainly the risk
of expropriation).
7. A Eurodollar is a dollar deposit in a foreign bank, normally a European
bank. The foreign bank need not be owned by foreigners it only has to
be located in a foreign country. For example, a Citibank subsidiary in
Paris accepts Eurodollar deposits. The Frenchmans deposit at Chase
Manhattan Bank in New York is not a Eurodollar deposit. However, if he
transfers his deposit to a bank in London or Paris, it would be. The
existence of the Eurodollar market makes the Federal Reserves job of
controlling U.S. interest rates more difficult. Eurodollars are outside the
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International Aspects of Corporate Finance Chapter 31
III. Problems
Problem 1
Problem 2
Note that an indirect quotation is given for Israeli shekel; however, the cross
rate formula requires a direct quotation. The indirect quotation is the
reciprocal of the direct quotation. Since $1 = 4.0 shekels, then 1 shekel =
$0.25.
Yen/Shekel = $0.25 per shekel 90 yen per dollar
= 22.50 yen per shekel
Problem 3
rNOM, 6-month T-bills = 4%; rNOM of similar default-free 6-month Japanese bonds
= 2.5%; Spot exchange rate: 1 yen = $0.010; 6-month forward exchange rate = ?
rh = 4% / 2
= 2%
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Chapter 31 International Aspects of Corporate Finance
Problem 4
The spot exchange rate between the euro and the dollar is:
U.S. T.V. = $500; EMU T.V. = 312.5 euros; Spot rate between euro and
dollar = ?
Ph = Pf (Spot rate)
$500 = 312.5 euros (Spot rate)
500 / 312.5 = Spot rate
$1.60 = Spot rate
Problem 5
The dollars required to purchase 1,000 units for each of the following currency is
as follows:
U.S. Dollars
Required to
Buy One Unit of Purchase Price
Currency Foreign Currency 1,000 = in Dollars
British pound 1.5282 1,000 = $1,528.20
Canadian dollar 0.9569 1,000 = 956.90
EMU euro 1.2893 1,000 = 1,289.30
Japanese yen 0.011437 1,000 = 11.44
Mexican peso 0.0782 1,000 = 78.20
Swedish krona 0.1359 1,000 = 135.90
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International Aspects of Corporate Finance Chapter 31
Problem 6
The price of krones is $0.15 today. A 10% appreciation will make it worth
$0.1650 tomorrow. A dollar will buy 1 / 0.1650 = 6.0606 krones tomorrow.
Problem 7
Problem 8
Spot rate: 1 yen = $0.0114; Forward rate: 1 yen = $0.0114; r NOM of 90-day
Japanese risk-free securities = 2%; r NOM of 90-day U.S. risk-free securities = ?
rf = 2.0% / 4
= 0.50%
rh = ?
rNOM = 0.50% 4
= 2%
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Chapter 31 International Aspects of Corporate Finance
Problem 9
a. rNOM of 90-day U.S. risk-free securities = 3%; r NOM of 90-day British risk-free
securities = 3.5%; Spot rate: 1 pound = $1.50; forward rate selling at
premium or discount = ?
rh = 3% / 4
= 0.75%
rf = 3.5% / 4
= 0.875%
The forward rate is selling at a discount, since a pound buys fewer dollars in
the forward market than it does in the spot. In other words, in the spot
market $1 would buy 0.6667 British pounds, but at the forward rate $1 would
buy 0.6675 British pounds; therefore, the forward currency is said to be
selling at a discount.
Problem 10
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International Aspects of Corporate Finance Chapter 31
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Chapter 31 International Aspects of Corporate Finance
= $546,242,459
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