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BUSI 3159
FINANCE IN THE GLOBAL MARKET
2023-2024 AUTUMN
NOTTINGHAM UNIVERSITY

FIRST SEMINAR

QUESTION 1

ABC CORPORATIONS are planning to pay dividends to their shareholders for the next four
years: $7.50, $8.25, $15, and $1.80. Due to their stakeholder’s engagement discussion, the
company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the
required return is 14 percent, evaluate the current share price of ABC CORPORATIONS.

QUESTION 2

XYZ shares provide a return of 11.6 percent and are selling at $43.20 currently. The total return
is evenly divided between the capital gains yield and the dividend yield. Evaluate the current
dividend per share (Assuming a constant dividend growth rate).

QUESTION 3

a) Bonds are issued by governments and corporations when they want to raise money. By
buying a bond, you're giving the issuer a loan, and they agree to pay you back the face
value of the loan on a specific date, and to pay you periodic interest payments along the
way, usually twice a year. ABC CORPORATION has $1,000 face value bonds outstanding
that pay interest semiannually, mature in 13 years, and have a 5.3 percent coupon. The
current price is quoted at 98.25. Evaluate the yield to maturity of ABC CORPORATION.

b) Assuming a new bond is issued under ABC CORPORATION subsidiary, DEF International to
settle the outstanding long term of Old World. The $1,000 face value bonds of Universe
International have coupon of 6.8 percent and pay interest semiannually. Currently, the
bonds are quoted at 103.5 and mature in 16 years. Evaluate the yield to maturity of DEF
International.

QUESTION 4

The ordinary shares of XYZ CORPORATION have a beta that is 5 percent greater than the
overall market beta. Currently, the market risk premium is 8.25 percent while the U.S. Treasury
bill is yielding 2.8 percent. Evaluate the cost of equity for this firm.

QUESTION 5

ABC CORPORATION has paid increasing dividends of $.10, $.12, $.15, and $.20 a share over
the past four years, respectively. The firm estimates that future increases in its dividends will
be equal to the arithmetic average growth rate over these past four years. The stock is currently
selling for $12.50 a share. The risk-free rate is 3.4 percent, and the market risk premium is 8.1
percent. Evaluate the cost of equity for this firm if its beta is 1.46.

QUESTION 6

Given the following information about Electric Transport, evaluate the Weighted Average Cost
of Capital (WACC). Assume the company's tax rate is 35 percent.

Debt 8,100, 6.9 percent coupon bonds

outstanding. $1,000 par value, 17 years to
maturity, selling for 101 percent of par, the
bonds make semiannual payments.

Common stock 175,000 shares outstanding, selling for $77

per share, beta is 1.32.
Preferred stock 9,000 shares of $7.50 preferred stock
outstanding, currently selling for $73 per
share.

Market 7.9 percent market risk premium and 3.6

percent risk-free rate.

QUESTION 7

A 5% bond makes coupon payments on June 15 and December 15 and is trading with a
YTM of 4%. The bond is purchased and will settle on August 21 when there will be four
coupons remaining until maturity. Calculate the full price of the bond using actual days.
 BUSI 3159
FINANCE IN THE GLOBAL MARKET
2023-2024 AUTUMN
NOTTINGHAM UNIVERSITY

SECOND SEMINAR

Question 1

M&M Proposition I with no taxes states the value of the levered firm is equal to the value of the
unlevered firm. So, with no taxes, the value of the firm if it issues debt is VU = VL = $47,000,000.
With corporate taxes, compute the value of levered firms and the equity value of the company
(with and without tax) if the debt level is $18,400,000 and the corporate tax rate is 23%.

Question 2

ABC Corporation is an all-equity firm. The firms’ CEO wishes to change the capital structure of the
firm. The CEO believes that debt financing will offer the firm’s greater long-term value.

a) Assuming that ABC has a return on assets of 12.6 percent and a cost of equity of 14.8 percent.
What is the pretax cost of debt if the debt-equity ratio is 0.38? Ignore taxes.

b) After 1 year, ABC’s return on assets improves to 17.5 percent and the debt-equity ratio increases
to 0.40. The pretax cost of debt is 7.5 percent. Ignoring taxes, what will the cost of equity be if the
firm debt level increases?

c) Discuss the consequences of higher debt-equity ratios on the firm’s risk and value.

Question 3

a) ABC has a tax rate of 34 percent and taxable income of $308,211. What is the value of the
interest tax shield if the interest expense is $39,700? Assuming the tax rate increases to 35 percent
and interest tax shield is valued at $8,046, how much did the firm pay in annual interest?

b) Suppose that ABC Corporation currently has no debt and has an equity cost of capital of 12%.
ABC Corporation is considering borrowing funds at a cost of 6% and using these funds to
repurchase existing shares of stock. Assume perfect capital markets. If ABC Corporation borrows
until they achieved a debt-to-equity ratio of 50%, what is ABC Corporation 's levered cost of
equity?
Question 4

ABC Corporation has 80,000 bonds outstanding that are selling at par value. Bonds with similar
characteristics are yielding 8.5%. The company also has 4 million shares of common stock
outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding
4% and the market risk premium is 8%. Jack's tax rate is 35%. What is ABC Corporation 's weighted
average cost of capital?

Question 5

a) ABC Corporation has 210,000 shares of common stock outstanding at a market price of $36 a
share. Last month, ABC Corporation paid an annual dividend in the amount of $1.593 per share.
The dividend growth rate is 4%. ABC’s also has 6,000 bonds outstanding with a face value of
$1,000 per bond. The bonds cost of debt is 7.25%. The bond value in total is $5.94 million. The
company's tax rate is 34%. What is ABC Corporation’s weighted average cost of capital?

b) Assuming the CAPM or one-factor model holds, what is the cost of equity for a firm if the firm's
equity has a beta of 1.2, the risk-free rate of return is 2%, the expected return on the market is
9%, and the return to the company's debt is 7%?

Question 6

a) Suppose ABC Company is unlevered. The firm is financed 100 percent using equity and can
borrow at the rate of 12%. The company is currently considering issuing 10,000 shares of its
company to the public. The firm’s weighted average cost of capital is 14% and the tax rate is 30
percent. What is the company’s cost of equity using the M&M Proposition II theory with taxes?
(Formula: RE = RU + (RU – RD)(D/E)(1 – TC))

i. Calculate the cost of equity if ABC has 25 percent of debt?

ii. Based on question (ii), calculate the company’s new weighted average cost of capital?

iii. What is the implication of M&M Proposition II theory with taxes on firms’ capital structure?
 BUSI 3159
FINANCE IN THE GLOBAL MARKET
2023-2024 AUTUMN
NOTTINGHAM UNIVERSITY

THIRD SEMINAR

Question 1

ABC CORPORATION has a predicted cash inflows for year 1 to year 5 of £769m. The depreciation
predicted for the whole project is £200m. The tax rate is 28.60%, payable the following year in
arrears. The project initial cost of working capital is £2000m. The discount rate applicable to this
project is 10%. At the end of the project in year 5, the before tax salvage value of the machine
used for the project is £500 liquidated in year 6. Compute the NPV in £m. Do you recommend
ABC corporation for accepting this project.

Question 2

ABC Corporation has issued equity and bonds to finance its capital expansion. As the finance
manager to you need to evaluate the firms’ weighted average cost of capital. Below is the
information of ABC’s equity and bonds issuance.

▪ The current share price is RM 3. Dividend is RM0.2528. The growth rate of the dividend is
assumed to be 6.81%.

▪ The bonds are redeemable at par in 10 years’ time. Their current market value is RM 846.05
percent. Annual interest has just been paid on the bonds. The bonds coupon interest is
RM 62.62 annually.

▪ There have been no issues or redemptions of ordinary shares or bonds during the past
five years. The current rate of corporation tax is 30%, and the current basic rate of income
tax is 25%. Assume that there been no changes in the system or rates of taxation during
the last 5 years.

▪ The market value for ordinary shares are $9060 millions and $977.6 millions for the bonds.
Question 3

a) PG plc is considering investing in a new project in Canada which will have a life of 4 years. The
initial investment is C$120,000 including working capital. The net after tax cash flows which the
project will generate are C$70,000 per annum for years 1,2 and 3 and C$55,000 in year 4. The
terminal value of the project is estimated at C$40,000, net of tax.The current spot rate of Canadian
dollars against the pound sterling is 1.5890. Economic forecasters expect the pound to
strengthened against the Canadian dollar by 5% per annum over the next 4 years. The company
evaluates UK projects of similar risk at 14%. Calculate the NPV of the Canadian project .

Items Year 0 Year 1 Year 2 Year 3 Year 4

C$'00 C$'000 C$'000 C$'000 C$'000
0

Investment C$'000 -120 40

After tax cash flows C'$'000 70 70 70 55

Net cash C$'000 -120 70 70 70 95

 BUSI 3159
FINANCE IN THE GLOBAL MARKET
2023-2024 AUTUMN
NOTTINGHAM UNIVERSITY

FOURTH SEMINAR

QUESTION 1

You just returned from some extensive traveling throughout the Americas. You started your trip
with $55,000 in your pocket. You spent 4.5 million pesos while in Chile and 16,500 bolivares in
Venezuela. Then on the way home, you spent 47,500 pesos in Mexico. How many dollars did you
have left by the time you returned to the U.S. given the following exchange rates? (Note: Multiple
symbols are used to designate various currencies. For example, the U.S. dollar is notated as "$" or
as "USD".)

Country US Dollar Equivalent Currency per US Dollar

Chile - 668.0001

Mexico 0.0777 -

- 2.1473

QUESTION 2

Assume the spot rate for the Japanese yen currently is ¥98.48 per $1 and the one-year forward
rate is ¥97.62 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate
parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?
QUESTION 3

Assume the spot rate for the British pound currently is £0.6211 per $1. Also assume the one-year
forward rate is £0.6347 per $1. A risk-free asset in the U.S. is currently earning 3.4 percent. If
interest rate parity holds, what rate can you earn on a one-year risk-free British security?

QUESTION 4

How well do you think relative purchasing power parity (PPP) and uncovered interest parity (UIP)
behave? That is, do you think it's possible to forecast the expected future spot exchange rate
accurately? What complications might you run into?

QUESTION 5

The risk-free rates are 5% in U.S. dollars ($) and 6.5% in British pounds (£). The current spot
exchange rate is $1.7301/ £. Calculate the no-arbitrage $ price of a 6-month £ futures contract.

QUESTION 6

ABC Corporation is a multinational company operating in UK that has subsidiaries in various

countries. The company has several receipts from its subsidiaries.

Subsidiary in A ($millions) B($millions) C($millions) D($millions) E($millions)

US Dollar
Receipts 90 50 40 20 30
Payments 170 120 50

Subsidiary A B(€millions) C(€millions) D(€millions) E(€millions) F(€millions)

in € Euros (€millions)
Receipts 75 85 72 20 52 35
Payments 72 35 50 20 65

Foreign Exchange Rate $/£ €/£

Spot 1.7982-1.8010 1.4492-1.4523
3 months forward 1.7835-1.7861 1.4365-1.4390

$/£ options £62,500 contract size. Premium in cents per £

Calls Puts
Strike price February May February May
1.80 1.96 3.00 3.17 5.34
1.78 2.91 3.84 2.12 4.20
Assuming now is 31 December 2022, and the CEO is very concerned on the interest rates
announcement by the Federal Reserve, devise a hedging strategy using 3 months forward and
options.
 BUSI 3159
FINANCE IN THE GLOBAL MARKET
2023-2024 AUTUMN
NOTTINGHAM UNIVERSITY

FIFTH SEMINAR

QUESTION 1

Based on the diagram below explain how the Turkish banks were performing uncovered interest
arbitrage. Do you feel this was an inappropriate investment policy?

After repayment of the

US$ debt the Turkish
bank pocket the
Eurodollar market is 8% per annum.
Turkish Banks borrow uncovered interest
US$ arbitrage profits
X 1.08 $1,080,000(repay)-
$1,200,000
(earn)=$120,000 (profit)
$1,000,000$
UNCOVERED INTEREST ARBITRAGE
(UIA) TURKISH BANK

S=Turkish lira 500,000/$ S=Turkish lira 500,000/$

Turkish lira X 1.20 Turkish lira

500,000,000,000 600,000,000,000
Turkish government bond market
(20% per annum)
Convert dollar proceeds into Turkish At the end of the period, the banks
Lira and invest in Turkish government convert the lira back to US Dollars at
bonds. the fixed exchange rate.

Describe precisely how the Turkish banks were performing uncovered interest arbitrage. Do you
feel this was an inappropriate investment policy?
QUESTION 2

The U.S. dollar interest rate is 8%, and the euro interest rate is 6%. The spot exchange rate is
$1.30 per euro (USD/EUR), and the 1-year forward rate is $1.35 per euro. Determine whether a
profitable arbitrage opportunity exists and illustrate such an arbitrage if it does.

QUESTION 3

Currency Currency per U.S. $

Japan yen 115.77

6-months forward 112.80

Canada dollar 1.1379

3-months forward 1.1339

Based on the following information, explain the possible appreciation or depreciation on the
values of Japanese Yen and Canadian dollar against the US $.

QUESTION 4

Suppose the Japanese yen exchange rate is ¥114 = $1, and the United Kingdom pound exchange
rate is £1 = $1.83. Also suppose the cross-rate is ¥191 = £1. What is the arbitrage profit per one
U.S. dollar?

QUESTION 5

ABC Corporation is planning to purchase a plant costing $30,000. The project would also require
an initial investment of $8,900 in net working capital. The initial working capital investment will be
made at the time of the purchase of the building and equipment. The project's estimated
economic life is four years. At the end of that time, the building is expected to have a market value
of $17,000 and a book value of $23,000 whereas the equipment is expected to have a market
value of $6,000 and a book value of $3,000. The sales for ABC are estimated to be $98000 yearly.
The production department has estimated that variable manufacturing costs will total 60% of sales
and that fixed overhead costs, excluding depreciation, will be $10,000 a year [costs: (0.60)80,000
+ 10,000 = 58,000]. Under the Under MACRS, the pre-tax depreciation for the building and
equipment is:

Year 1 = $4000; Year 2 = $6000; Year 3 = $3500; Year 4 = $2,500

ABC Corporation tax rate is 40%; its cost of capital is 12%; and the plant will begin operations
immediately after the investment is made, and the first operating cash flows will occur exactly one
year later. Since ABC would like to transfer its cash flows to its parent company in Malaysia,
compute the firms’ NPV and IRR in MYR. Determine whether the project should be implemented.
Below is the anticipated exchange rate for year 0 to year 4 for RM/$:

Year 0 1 2 3 4
Exchange 4.5 4.78 4.45 4.8 4.9
rate RM/$

QUESTION 6

ABC Corporation has annual earnings before interest and tax of $15 million. These earnings are
expected to be constant. The market price of the company’s ordinary shares is 86 cents per share
cum dividend, and of bonds $105.50 per bond ex interest. An interim dividend of 6 cents per share
has been announced. Corporate tax rate is 35% and all available earnings are distributed as
dividends.

ABC Corporation’s long term capital structure is shown below:

$000
Ordinary shares (25 cents per par
12500
value)
Reserves 24300
36800
16% bond 31 December 2023 ($100 23697
par value)
60497

Required:

Calculate the weighted average cost of capital for ABC Corporation assuming the year now is 31
December 2020.