 Question 1

The current spot USD/HUF exchange rate is 297.67. Long-run inflation in Hungary is estimated at 11.3
percent annually and 3.0 percent in the United States. If PPP is expected to hold between the two
countries, what spot exchange should one forecast 3 years into the future? (XXX.XX)
Selected Answer: 375.59
Correct Answer: 375.59 ± 0.01
Response Feedback: Chapter 18, problem 2
 Question 2

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa.
The initial cost of the project is ZAR99. The annual cash flows over the five year economic life of the
project in ZAR are estimated to be 26, 30, 39, 46, and 53. The parent firm’s cost of capital in dollars is
9.1 percent. Long-run inflation is forecasted to be 1.6 percent per annum in the U.S. and 8.5 percent in
South Africa. The current spot foreign exchange rate is USD/ZAR = 13.95 (Rand/$).
What is the NPV in dollars if the actual pattern of USD/ZAR exchange rates is: S(0) = 13.95, S(1) =
13.78, S(2) = 15.11, S(3) = 15.72, S(4) = 15.15, and S(5) = 16.19?
Selected Answer: 2.47
Correct Answer: 2.472 ± 0.005
Response Feedback: Chapter 18 problem 5
 Question 3

The Beta Corporation has an optimal debt ratio of 26 percent. Its cost of equity capital is 12.5 percent
and its before-tax borrowing rate is 4.6 percent. Given a marginal tax rate of 36 percent, calculate the
cost of equity for an equivalent all-equity financed firm. (X.XX%)
Selected Answer: 11.05%
Correct Answer: 11.05 ± 0.01 (%)
Response Feedback: Chapter 18 problem 3
 Question 4

Zeda, Inc., a U.S. MNC, is considering making a fixed direct investment in Denmark. The Danish
government has offered Zeda a concessionary loan of DKK17,000 at a rate of 3.9 percent per annum.
The normal borrowing rate is 6.5 percent in dollars and 6.0 percent in Danish krone. The loan
schedule calls for the principal to be repaid in three equal annual installments. What is the present
value of the benefit of the concessionary loan? The current USD/DKK spot rate is 5.912 and the
expected inflation rate is 2.5% in the U.S. and 1.2% in Denmark. (USD, no decimals)
Selected Answer: 67
Correct Answer: 66
Response Feedback: Chapter 18 problem 4
 Question 5
 The Beta Corporation has an optimal debt ratio of 46 percent. Its cost of equity capital is 11.8 percent
and its before-tax borrowing rate is 6.8 percent. Given a marginal tax rate of 40 percent, calculate the
weighted-average cost of capital (X.XX%)
Selected Answer: 8.25%
Correct Answer: 8.25 ± 0.01 (%)
Response Feedback: Chapter 18 problem 3
 Question 6

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa.
The initial cost of the project is ZAR112. The annual cash flows over the five year economic life of the
project in ZAR are estimated to be 29, 32, 37, 49, and 53. The parent firm’s cost of capital in dollars is
8.5 percent. Long-run inflation is forecasted to be 2.6 percent per annum in the U.S. and 9.2 percent in
South Africa. The current spot foreign exchange rate is USD/ZAR = 14.47 (Rand/$).
Determine the NPV in USD by calculating the NPV in ZAR using the ZAR equivalent cost of capital
according to the Fisher Effect and then converting to USD at the current spot rate. (USD, X.XXX)
Selected Answer: 0.9241
Correct Answer: 1.002 ± 0.005
Response Feedback: Chapter 18 problem 5
 Question 7

The Alpha Company plans to establish a subsidiary in Hungary to manufacture and sell fashion
wristwatches. Alpha has total assets of $72 million, of which $43 million is equity financed. The
remainder is financed with debt. Alpha considered its current capital structure optimal. The
construction cost of the Hungarian facility in forints is estimated at HUF2127,000,000. The Hungarian
government is offering a below-market borrowing rate. Alpha wonders what amount of subsidized debt
they can get from the government. Estimate the amount they can use if they want to keep the same
capital structure. (round the answer to nearest million)
Selected Answer: 857
Correct Answer: 857 ± 1
Response Feedback: Chapter 18, problem 1
 Question 8

Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa.
The initial cost of the project is ZAR102. The annual cash flows over the five year economic life of the
project in ZAR are estimated to be 26, 35, 40, 45, and 53. The parent firm’s cost of capital in dollars is
9.4 percent. Long-run inflation is forecasted to be 1.5 percent per annum in the U.S. and 9.3 percent in
South Africa. The current spot foreign exchange rate is USD/ZAR = 14.99 (Rand/$). Determine the
ZAR equivalent cost of capital according to the Fisher Effect (XX.XX%)
Selected Answer: 17.81%
Correct Answer: 17.81 ± 0.01 (%)
Response Feedback: Chapter 18 problem 5