Category Archives: Finance

Given the bank forward rates in part (a), were short-term interest rates higher or lower in Poland than in Canada? Explain

Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you 100,000 CAD in three-month’s time when the installation will occur. However, it insists on paying in Polish zloty (PLN). You don’t want to lose the deal (the company is your first client!) but are worried about the exchange rate risk. In particular, you are worried the PLN could depreciate relative to the CAD. You contact Fortis Bank in Poland to see if you can lock in an exchange rate for the PLN in advance.

a. The current spot exchange rate is 2.3117 PLN per CAD. The three-month forward exchange rate is 2.2595 PLN per CAD. How many PLN should you demand in the….

Plot your profits in one year from the contract as a function of the exchange rate in one year, for exchange rates from 0.75 CAD/EUR to 1.50CAD/EUR. Label this line “Unhedged Profits.”

You are a broker for frozen seafood products for Choice Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will he king crab is 110,000 CAD. All cash flows occur in exactly one year.

a. Plot your profits in one year from the contract as a function of the exchange rate in one year, for exchange rates from 0.75 CAD/EUR to 1.50CAD/EUR. Label this line “Unhedged Profits.”

b. suppose the one-year forward exchange rate is 1.25 CAD/EUR. Suppose you enter into a forward contract to sell the EUR you will receive at this rate. In the figure from part (a), plot your combined profits from the crab contract and the forward contract as a function of the….

What is the present value of the 5 million EUR cash inflow computed by first discounting the EUR and then converting it into CAD?

You are a Canadian investor who is trying to calculate the present value of a 5 million EUR cash inflow that will occur one year in the future. The spot exchange rate is S 5 1.25 CAD/EUR and the forward rate is F1 = 1.215 CAD/EUR. You estimate that the appropriate CAD discount rate for this cash flow is 4% and the appropriate EUR discount rate is 7%.

a. What is the present value of the 5 million EUR cash inflow computed by first discounting the EUR and then converting it into CAD?

b. What is the present value of the 5 million EUR cash inflow computed by first converting the cash flow into CAD and then discounting?

c. What can you conclude about whether these markets are….

. What is the present value of Mamma Mia’s 4 million PLN inflow computed by first discounting the cash flow at the appropriate PLN discount rate of 10% and then converting the result into CAD?

Mamma Mia Enterprises, a Canadian manufacturer of children’s toys, has made a sale in Poland and is expecting a 4 million PLN cash inflow in one year. The current spot rate is 2.040 PLN/CAD and the one-year forward rate is 2.055 PLN/ CAD.

a. What is the present value of Mamma Mia’s 4 million PLN inflow computed by first discounting the cash flow at the appropriate PLN discount rate of 10% and then converting the result into CAD?

b. What is the present value of Mamma Mia’s 4 million PLN inflow computed by first converting the cash flow into CAD and then discounting at the appropriate CAD discount rate of 6%?

c. What can you conclude about whether these markets are internationally integrated, based on your answers to….

What is the USD present value of the project?

Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etihad’s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in EUR, are shown here:

You know that the spot exchange rate is S = 1.15 USD/EUR. In addition, the risk-free interest rate on USD is 4% and the risk-free interest rate on EUR is 6%. Assume that these markets are internationally integrated and the uncertainty in the free cash flows is not correlated with uncertainty in the exchange rate. You determine that the USD WACC for these cash flows is 8.5%. What is the USD present value of the project? Should Etemadi Amalgamated undertake the project?

What is Javelin Consulting’s after-tax cost of debt in JPY?

The dollar cost of debt for Javelin Consulting, a Canadian research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its JPY cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new investment there. The risk-free interest rates on CAD and JPY are rCAD = 5% and rJPY = 1%, respectively. Javelin Consulting is willing to assume that capital markets are internationally integrated and that its free cash flows are uncorrelated with the JPY–CAD spot rate. What is Javelin Consulting’s after-tax cost of debt in JPY? (Hint: Start by finding the after-tax cost of debt in CAD and then find….

What is the present value of the project in EUR?

McCain Foods, a Canadian food processing and distribution company, is considering an investment in Germany. You are in McCain’s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in EUR, are uncorrelated to the spot exchange rate and are shown here:

The new project has similar dollar risk to McCain’s other projects. Management at the company knows that its overall CAD WACC is 9.5% and so is comfortable using this WACC for the project. The risk-free interest rate on CAD is 4.5% and the risk-free interest rate on EUR is 7%.

a. McCain is willing to assume that capital markets in Canada and the European Union are internationally integrated. What is the company’s EUR WACC?

b. What is….

What is Tailor Johnson’s U.S. tax liability on its Ethiopian subsidiary?

Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 100 million ETB (Ethiopian birrs). The current exchange rate is 8 ETB/ USD or 0.125USD/ETB. The Ethiopian tax rate on this activity is 25%. Tax law in the United States requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as profits earned in the United States, which is currently 45%. However, the United States gives a full tax credit for foreign taxes paid up to the amount of the U.S. tax liability. What is Tailor Johnson’s U.S. tax liability on its Ethiopian subsidiary?

What is the present value of deferring the U.S. tax liability on Tailor Johnson’s Ethiopian earnings for 10 years?

Tailor Johnson, the menswear company with a subsidiary in Ethiopia described in Problem 13 is considering the tax benefits resulting from deferring repatriation of the earnings from the subsidiary. Under U.S. tax law, the U.S. tax liability is not incurred until the profits are brought back home. Tailor Johnson reasonably expects to defer repatriation for 10 years, at which point the ETB earnings will be converted into USD at the prevailing spot rate, S10, and the tax credit for Ethiopian taxes paid will still be converted at the current exchange rate = 0.125 USD/ETB. Tailor Johnson’s after-tax cost of debt is 5%.

a. Suppose the exchange rate in 10 years is identical to this year’s exchange rate, so S10 = 0.125 USD/ETB. What is the present value of deferring….

What is the Canadian tax liability on the earnings from the Polish subsidiary assuming the Swedish subsidiary did not exist?

Qu’Appelle Enterprises, a Canadian real-estate investment firm, is considering its international tax situation. Canadian tax law requires Canadian corporations to pay taxes on their foreign passive income at the same rate as profits earned in Canada; this rate is currently 35%. However, a full tax credit is given for the foreign taxes paid up to the amount of the Canadian tax liability. Qu’Appelle has major operations in Poland, where the tax rate is 20%, and in Sweden, where the tax rate is 60%. The profits, which are fully and immediately repatriated and foreign taxes paid for the current year are shown here:

a. What is the Canadian tax liability on the earnings from the Polish subsidiary assuming the Swedish subsidiary did not exist?

b. What is the….