TOPIC 3_ REVIEW QUESTIONS THE ECONOMICS OF THE FOREX MARKET 1. Answer the following questions on the basis that the euro/US $ exchange rate is 1.1168 - 1.1173 (i) What is the cost of buying €200,000? (ii) How much would it cost to purchase US$ 4m? (ji) How many dollars would be received from selling €800,000? (iv) How many euros would be received from selling US$ 240,000? 2. Assuming that the arbitrageur has £10,000, show how she can exploit any arbitrage profit. The following spot quotes in the foreign currency markets are available: + £0.67917/€ © $1.74368/E © €0,84274/$ 3. Why arbitrage opportunities, such as the one indicated above, are rare to find in the foreign currency? 4, Describe the difference between the spot and forward currency markets. 5. The US § appreciated by 20% against the Thai baht - the bath/$ prevailing rate is 30/$. By what percent did the baht depreciate against the dollar? 6. Determine the forward premium [discount] for the currency and maturity as specified In each row of the following table of rates quoted as HuFI/$ [HuFI denotes Hungarian Florint). Currency spotrate forwardrate Maturity $ 247.785 267.25 12months HUFL 247.785 252.805 3months ‘Scanne wih CamScanetEcpormncs of Foesx. baer / les . Qos L Be Bt bee one (ac g AER Aha. sll « ‘ P) soak As le cosh aq bayins athe aooeved | bred engar é | ee = REE a5, tnaq os 1K = [Gee . i te 206,000 = ITA OBI usd> | “vga us Bae eos sees an = t 464, tee 3 @ Wo wosz Autler creel le eased cele sethas 3 Feu | € 02,000 Vas = Fiboit-: | > saieas VeF _ tHe/c00 ANS OTK VUE: - | s UVB. 1 | | ‘Scanne wih CamScanet| ve Bar TOETUTPS ’ \ 4 (eran Lomewety ae commen = gerfer vetlel = woo yuurmPpe/s Sz INFAUE janes clus —p wor valeadl, | = o-gurte / f- _i4tre te = 4 - Starz |p ZorTwUrre r = = AFH - | evar Gus =P commence - | dhrsser Je | Iyure 27 a MESIe (2 KALTEBE | m 1002 oa | Ac bitea go. pert = locre — \rooe = 22° | | | dvvad vant ut aN Ba NeadvanTages 9 arki Wage ope? usities l= SMALL Gorannk Sp ROL Keoeg le (eae eared) es S\ALd * | —cosnelventag caleulelien Certs cake cegatecht tant) | pret See KK 2 Bae ‘carne wih CamScanet4 EF Peawtun: “RO & Promo + Seen “ROC rece, 1), dear. sol ly VR = ge bh asx eS, = G-: Bote (E226 bir = Pcevarvhns ei — Kovaes ah Kuo - — ey AO Kw 9 = = Yy Klee Qe Se = hs Peerdvea | leeEenel S(Foword acte— cet a \ ye IY sete ao a SY Us — eres) x v2 aeeretraa: WCE Ut HES = ovozer. = [Usd BS — ust peo \ x 12 TRE FES re = G08. ‘Scanne wih CamScanet7. You entered into a deal to purchase a consignment from the US for $300,000 Payable in three month’s time. Having your international finance course, you decide to manage the exposure. After discussion with the CRDB bank the following data have been made available. Foreign exchange market Spot rate $/Tshs 1.5000 ~ 1.5050 Three months forward premium 1.00- 0.80 Required Calculate the three month outright forward rate. 8. Kingo is a large Mzumbeland company with export and import trade with Chang. The following transactions are due within the next six months. Transactions are in the currency specified, Purchases of raw materials, cash payment due in three months: MZS 290,000 Sale of finished goods, cash receipt due in three months: Ch 492,500 Purchase of finished goods for resale, cash payment due in six months Ch 1,117,500 Sale of finished goods, cash receipt due in six months: Ch 385,000 Exchange rates (NAH market) ch/mzs Spot 1.7106 - 40 3-months forward 0.82 - 0.77 cpm 6-months forward 1.39 - 1.34 cpm You are required: To calculate the net MZS receipts/payments that Kingo might expect for both its three- and six-month transactions if the company hedges foreign exchange risk on the forward foreign exchange market. ‘Scanne wih CamScanetPachuse foe 4 2oo,0cd + Sgoreta ex soon Ns SVSB = Loreal F.e 4.0 2) SO" Roed at: Set LBs pen Be | Roh gab f/m 0 (aay Fuad Wel D> Boer asle bo 2 oh Rese a Gare on et wae . \rsTo80 + = Mw EP? - 4+ 006d _— Fo Beopoo sek Ty ee Talltas Past. — filles ent. + Dadar’ > Fre ib SPH BE —> Raids Rid > AAQ [ssvsad io oe Bo 00 BOS Bile foyer. % lyQn Werlang: eset aE feccent = you. 2 1 Srocevz2ch. —*? oer 09 \ oF 4 St Coa ws 7 chluas Zraanth ” Gren th- bh Hog ~ Wye Lt1eG -— Nee teak OfL sony G6682 ~ oop, cent WAS = yay e024 = os !¥e, | | F- fale + Vouk ~ Le F068 1.696% — 1 F006. | 4 { | VE | © Pea Cent Praman) _— ‘deduct - cid Coast dyecst) — bad. | [Mts cect & Pageant: | \ (Mts cecisot wm Veantt s Cher) Po sale ay Memes gud ch RI 2e - | \es \s¥o6s ch. | i XS yQrse eek: | QBRLIG M25 - |. Fec Abseo ment ask cate = | Mes Mecagt Me PAE? TBR EUL TM seo | MUS Cocke = schy eesw: = 22TH. | Mw Jane ‘carne wih CamScanetWU Pagrus —— one yer Nz “Poymint 2 Geet foo res mrs BRk mo ee = 6st 174 - 27 Bojt30Illustration 1 e Assume you have equally invested your portfolio in TZ and UK stocks. The standard deviations are 18.2% and 34.4% in TZ and the UK respectively. The correlation coefficient between the two markets is 0.33. What is the standard deviation of the internationally diversified portfolio? 0, = 0.5*(0.182% +0.5°(0.3492, +2x0.5x 0.5x0.33x0.182, x0.344,, © =21.95% © The risk is significantly below the risk of the UK. IMlustration 2 e Assume that the expected return of risk assets 1 and 2 are 14% and 18% respectively. Their SD is 15% and 20% respectively. The correlation coefficient is 0.5. If an investor invests 0.4 in asset 1 and 0.6 in asset 2; e What will be the expected return of the investment portfolio? e What is the risk/SD of the investment portfolio?| | PORT FeLi. s 50% Coton, duration 4 Ale RI GICs) N(Werue a aa - Gr GOO Wowres > wletyutizt 4 2 GG a = Coe | Fok dad eset = \[atana ° wasonas €PCe-“F) # \ co a yrs Gua) OG. | Wlusteahe 4 Us, Fos Wet oer WS cathe Gea) - G = shoaderd dernten GS MAGNE SP Comers | BAY, Et gent cor = Rleai't." ew Pur) = 003 — «a Cur) = OU. £O1BEY KOFeKOr x org, \Lus Seer ah axtected celumn x | Lah Wy Roth | Te |e Hes og, se vt et j at wh ow Sos ‘Scanne wih CamScanetIvison Cxgesked Reler g fie Patealts > Eve (y, xe) 4 (eux e@) }% 2 Gaxeed) + Ger ong) FONG = Gee nb a i Be Ae” (nuastravab forkelis Cad, 419 2 toe = 84 Ss Qt ns = NG sx ois): Corgtear®) + @ xornexog x OK O11. x012) | = ia + Ge edict.)Activity = -Returns on shares A and B for alternative economic states State Probability ReturnonA Return onB 4 i P, Ry (%) Rp (4) Boom 0.3 20 3 Growth 0.4 10 35 Recession 0.3 0 -5 Expected returns and standard deviations for companies A & B Expected return Variance Standard deviation %. % % Company A 10 60 7.75 Company B 13.4 320.64 17.91 e Assume 90% of the funds are placed in ‘A’; calculate the portfolio expected return and standard deviation.ATI, EXteddh Retweny = (Pex Re) + Pax®) + (ax) | R = (osx od) + (G4 xan) (0x3 x0) F wh ond, as Ae ant adc = (R57 aR) t a CRz 8.) ~ ,(e-B) 4 “moe Carne) tony Cou orf)” 4 02(0- os) 206) qt. =e \eL 2a Wa at - oH Wael fe ge 7 : iw ets eS 0 & ape 2 (wR) #2) l= - = pa 2 aeKecked colors > _pitheolee 8 = (qigx ot) # O21 nor} Os\oaes i cecal i Lon 4 ele aii cist |Standard danghw 9. Pevtiolte + | = \ eras wear 42090 Pre GeIe + of \QeaPovontt) +onrty outtan’) # BXOq EO LEHEEK 9.0625 OOF. 2 Faw — UHent —_ cecralaks | | . (P: (Re @) clay #0) x 7,CRren) @ | Coen) Gago: 13a) 4 one (m4- 04) @30- 0. BE) t O63 (oreo) | orta)- 7 ~ 0.00112 4. PS +0: oset. Gr9024. - = ommeP i _—— Crome xo itai) - cs “Ele ee CC Ra~R Ry) Rar &) + ‘Scanne wih CamScanetLibrary Task e Suppose you are a euro-based investor who just sold Microsoft shares that you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 per share; the exchange rate was $1.15 per euro. You sold the stock for $135 per share and converted the dollar proceeds into euro at the exchange rate of $1.06 per euro. i. Determine the profit from this investment in euro terms. iii Compute the rate of return on your investment in euro terms. iii. How much of the return is due to the exchange rate movement?Wy Gered Vtie + 2A — Mepsoe Maint chee © (20-MCd" Prchonge emt fst ag. PMO BEA eso dhe hitler = — Senses tse TS lee a S30 Mie SEN woud es mech poe sed. | = @ UO , 2 = Nsw wo | “e asrg2. Sales shee: @ rac. Sales cevenee Gee 2? Wis = TP ep, Comte Uo IT9RRE ST LAE cum Ur Loe =e, USD Job = felers wae qt “| 2 [12086 = Sales tevin ~ ere Ruabbcin | = rear = eee | = rr. © Bah 4 Rlfim em fea. | al POR = [ ioe cont (= ones, awe y ‘Scanne wih CamScanet1) Hee pasah g Ve xetaun dee Dege | We acronis — Movagnin! He cechonse ervenat . | urp Vrs fe Usp 1kBeS ze | = Uy | —— ws = M280 -@ | He | Rxchoasy — movers = \2295 & @ cella 2 rest — yas, = 98s. = Ait | tare —\ wee ~ et ae : \nete \Vasp —\ooen = pus | Pork Bee wn & q Tle ye clay ~ ys : leone | a Sse . | ‘Scanne wih CamScanetDEPARTMENT OF ACCOUNTING AND FINANCE FIN 325 : INTERNATiONAL FINANCE - BAF (BS&PS) III ; TEST II (15%) INSTRUCTIONS: Use FULL Official Names end Registration Number; Answer All the : TWO Questions; ‘Time Allowed: GOMins 7 QUESTION ONE (07 MARKS) Kips, Inc., considers borrowing a portfolio of Japanese yen and Swiss francs to finance its U.S. operations. Half of the needed funding would come from each currency. Assume the following information based on historical information for several 3-month periods is available: * Mean effective financing rate of Swiss franc for 3 months is 3%. Meen effective financing rate of Japanese yen for 3 months is 2%. Standard deviation of Swiss franc’s effective financing rate is 0.04. Standard deviation of Japanese yen’s effective financing rate is 0.09. Correlation coefficient of effective financing rates of these two currencies is 0.10. Required: Determine; i. The mean effective rate on a portfolio (03 Marks) ii. The variance of this portfolio’s effective financing rate over time (03 Marks) (01 Mark) iii. Advice accordingly as far as risk reduction is concerned (08 MARKS)Vest. 2. wa. Mee agectite Fhonertg ott sons Fs es . sara 71 ree) S tender Cera hte sonts Ff 9 10fFs dager 1 oeqe Grteelahe elo, Wp ty, = ot : Oe Mean 2tactvie cake on porteolia + Some (war 4 wae) = (ore x ova) + Gre x Gor) = Soars © 4 3 2 ret e Swe + wyer fF BW WOO Ly ae, Px ovom™) HOH UPA) FL KOCKOLY Or! A Or OeKOOG, | | = S226. o1o02608: | | ® parle seduchs Ips \ sarcce =\(Voroorser = oor, SG —= > Woe is Serbs that 17. + \te Pehla ts Low us gus F sagone CaN Se sockeell then Losrmlas Oy clertaatde nana ¢ Cus) [= thes uctuians be Nouv sy Port golia halt tron Ueune Franc and hale ww Sofoneie Yen! ‘Scanne wih CamScanetExample; SSS SS nee a 3 Boca, Inc., needs $4 million for one year. It currently has no business in Japan but plans to borrow Japanese yen from a Japanese bank, because the Japanese interest rate is three percentage points lower than the U.S. rate. © Assume that interest rate parity exists; also assume that Boca believes that the one-year forward rate of the Japanese yen will exceed the future spot rate one year from now. a Will the expected effective financing rate be higher, lower, or the same as financing with dollars? Explain. Presented By KP Henrique Answer a ees O Since the forward rate is expected to over estimate the future spot rate, this implies that the yen will not appreciate to the level that would fully offset the interest rate differential. 0 Therefore, the expected effective financing rate of the yen is lower than the U.S. financing rate.ee LLL G Nevada, Inc., needs to borrow $100,000 for one year and obtains the following interest rate quotes: 5 Interest rate for a one-year loan in U.S. dollars is 15%. G Interest rate for a one-year loan in Swiss francs is 8%. G Interest rate for a one-year loan in Japanese yen is 9%. a Since the quotes for a loan in Swiss francs or Japanese yen are relatively low, Nevada may desire to borrow in a foreign currency. a If Nevada decides to use foreign financing, it has three choices based on the information given: i Borrow only Swiss francs, i. Borrow only Japanese yen, or ii. Borrow a portfolio of Swiss francs and Japanese yen. a Assume that Nevada has established the following information; ‘Scanne wih CamScanetoneal ie OE ee bates changelin SR) | change Occurring SF 1% 30% SF 3% 50% SF 9% 20% 190%. JY -1% 35% JY 3% 40% JY 7% 25% 100° The Effective Financing Rate can be Established as follows Zz (eit) esx eed el tip ed Effective Financing Rate SF 1% 30% (1.08)[1 + (0.01)]-1= 9.08% SF 3% 50% (1.08)[1 + (0.03)]-1= 11.24% SF 9% 20% (1.08)[1 + (0.09)]-1= 17.72% 100% NY -1% 35% (1.09)[1 + (-0.01)] -1= 7.91% SY 3% 40% (1.09)[1 + (0.03)] - 1 = 12.27% dY 7% 25% (1.09)[1 + (0.07)] -1= 16.63%a Given the 15 percent rate on U.S. dollar financing, there is a 25 percent chance that financing in Japanese yen will be more costly than domestic financing. Similarly there is a 20 percent that financing in Swiss francs will be more costly then domestic financing. a Before examining the third possible foreign financing strategy (the portfolio approach), determine the expected value of the effective financing rate for each foreign currency by itself. a This is accomplished by totaling the products of each possible effective financing rate and its associated probability as follows: SF 30%(9.08%) + 50%(11.24%) + 20%(17.72%) = 11.888% JY 35%(7.91%) + 40%(12.27%) + 25%(16.63%) = 11.834% 0 The expected financing costs of the two currencies are almost the same. The individual degree of risk (that the costs of financing will turn out to be higher than domestic financing) is about the same for each currency. a If Nevada, Inc., chooses to finance with only one of these foreign currencies, it is difficult to pinpoint Vij (based on our analysis). .hich.. currency is more appropriate. ‘Scanne wih CamScanet| ™" EPPICINE FNNDGNE QATS. cuca + Poste Ko spe Re EER ca Crti) rey) ~1 ye 1 | se sh e?, (rows) (it om)~1 = qtod, « j se | a7, 2%), Grower) ibost)~s 2 was, * e 1% 187 (1 pevet) Crt0%) 4 = gays 5 | loos, ‘ a L ee My ue], Ct + ova) (eGo!) -1 = rath uy a aoh Ci toa} (1+ oro) ~y = 2% hy | TW. hw (1 gores) 4 ove?) == 16.69% | 108), | ( Seco) : j deste te Uyevest a cue tMae e Pobabit, Cash) og gellar \sss | | Se | Tatoos ten There UF, Weak “te wily We eth + Poe! : aaaected value % Eptective vate tanensey coragaberfia 9 exeecte§ caluos ~ OF ABS x 0M) tC MAL) ACHE HAL > vee sv (7 x sag) 4 Geoh x 22D) 4 (25% \o@%) . We 8P8l, ‘Scanne wih CamScanet~~ Ne ] ah » 4 Stzor Pree Jochfoles, gurls Frans Sacer tye RS AR ER REbete TE ah qoRle 5 TW BSL XB Le Jose sales x qoH) For K FAL) ~ Saasl wet, | Ure. Be eae WI, Corks of.) a(orsy 122) =, bel Gon 6ebEL wy. xrrdh= HL (ors gees) + Cour £663) > yr.gecZ tree), Bak at vhs ude Cosmeabadt) A(owrn ear > endl Wwee/, rasa sv Xa8L2 lL Coward) (own reel) > 04587 WU), 2 Ube). els she Cos x wont) +@erg eer FIHASL nary, | Bk Bl xu. FoF, (ox aD eesy. rare) — Frvs0 Paar yr Ak ash og, (ory Rath 4 Orerney) — = atid rel edie? Wrest bl, @s« 12-24) A(ow (ebtpy = rel Tooke | ur jnteert are) te Ste Rockiaity “that ate Rachfolle sell be cectty the fens domo hedls _i } | } i i | os Ga) * ME Quy siest 2 ers es ee OO cansay | Bele gq chanms — Patabhty ere RAE 6 Geer d rena , 2 =Gi &L (1 roseel) Citows)~b Fo sie 1s2/ S| ~ He oh C1 +988) Crt coy) ~t = LERh sé [ Tie we ue oot) () -ool)~f = Gael ce | a7, ate (Aro103) CU ool) ~f = FoF 2 | ile wl (te 108) @ +004) “A? jr, ee UL Cutovat)(inecd =n = ht ee ce &/. ten < - a ‘ vf) Ct Lorod) ~hs 3 1 Bele - |= “m i 2 vy = ie > oF | 156 St Cr ter) Crs) =f 7 18th AAS a8 pute alle : - _ Wee Posibitety Ahk ts oc Tr sutss Func tt ir coctel [stron dertastiealls + aBr aeeted wale my the eqecki f | nines rab : axercted value Se ekteoks Raance ae, i sas x wee) + 4 Fox Kt bs 6€1.) 4 (ele x veel.) = AS B28/ (SER SEL SF WERT be.) 4% Ke 2427) + fes'pe x 9287) teh xiest| |, weno pas wD Ure Mepoe , \kerat Re Gop ovo’ * | v leggcce, te | OS ge —> OF ve ff y2s- (wel 2 eR woe CHB | 1okese = 7 25 of, 20D = Sthe00 > bygoeer Pees HARE K o a(t) Gre) -a- whee CF Reeshve eae | TR = ryurtet aterask carte om fertiégn cumency, em Paseentage change Cagewazhin ar dagtacecte), re Groowe) 5, 2 (08) Cee) -1 = Otago: Hoh ‘Scanne wih CamScanettoee 4. RARITH Zs unTION Sire + ABSOLUTE Poy = Ss Poy, foc . he Qt Yu Sur, Efe. ‘ Swe. Relative ~ yee Qa e = vuedhang cate “Coalere) Qe = Peeminr Prodalins exe “Cevchangs) + Ra (nplakion 4 werlerlyms Pek Inrlahen | teference ib BK leew ae cumains ansx® weld Gg sn eth a [Recktrely + Witte D ecchanp ate ox Teh ve Lterh Nee Abe value 4 leenya shilling Tee We tea WRK rendg) . Sela + Biot pea @o- (c +P)" z 2, =(Qr ows) yor Qres) FTW 10-6 | she ‘Scanne wih CamScanetMlustration 5 Suppose the current price level in U.S is at 112 while the German price level is at Euro 107, relative to base price level of 100. If the in value of the Euro was $0.48, then according to PPP to how extent the dollar value of the Euro should rise? Solution: 112 x 0.48 = $0.5024 107 The dollar value of the Euro should have risen to approximately $0.5024 The main justification for purchasing power parity is that if a county experiences inflation rate higher than those of its main trading partners, and its exchange rate does not will become less competitive with comparable change, its exports of goods and sei a2 products produced elsewhere. Imports from abroad will also become more prices competitive with higher priced domestic products.Qr kate : . a | gaa ws SWE: ae ~ Bet 8H BHO _ —_——— o> _s Wied ales = Fora. Is: asco 4 ee be Yeo octet | Sel ———— toa “udale xX: a aa Pace Masser _ M2 KOT RE er SQ FO _ Ralets _axcranse Uo Wwhecesh sate + excronse QE Rock cele eh ete _ i ’ nn Ure ecto, “gy rctan tm iw dani \ \a ves — le “equal B Ve cats _o relarn to deg, ‘Scanne wih CamScanet‘Scanne wih CamScanetREVIEW QUESTIONS: INTERNATIONAL CAPITAL BUDGETING Hollender Company is a South-African based manufacturer of kitchen furniture. The company’s senior management have believed for several years that there is little opportunity to increase sales in the domestic market and wish to set up a manufacturing subsidiary in Tanzania. Because of high transportation costs, exporting from South Africa is not financially viable. The Tanzania subsidiary would involve the construction of a new factory in Dar Es Salaam. The projected costs are shown below: Now Year 1 TZS 000" TZS"000" Land 23,000 = Building 16,000 62,000 ‘Machinery = 64,000 Initial Investment in Working Capital 15,000 = Production and sales in year two are estimated to be 2,000 kitchens at an average price of TZS200,000 (at current prices). Production and sales in each of years 3-5 is forecast at 2,500 units. Total local variable costs in Tanzania in year two are expected to be TZS1 10,000 per unit(at current prices). No tax allowable depreciation exists on fixed assets. All prices and costs in Tanzania are expected to increase annually by the current rate of inflation. The after tax realizable value of the investment in five years’ time is expected to be approximately TZS162 million at price levels then ruling. Inflation for each of the next six years are expected to be: SA 3% TANZANIA 5% The cost of capital for the company is 10%. The spot exchange rate is TZSSO/SAR. Corporate tax in ‘Tanzania is 30%, in SA 40%. Taxation is payable, and allowances are available, one year in arrears. The government of Tanzania is anxious to encourage foreign investment and thus allows overseas investors to repatriate an annual cash dividend equal to that year’s after tax accounting profit. Cash remitted to SA from the subsidiary is not taxable in South Africa. Required: Evaluate whether the Tanzanian Subsidiary should be established by Hollender Company.Sdn 5 7. _ Capd Ja) byrlgehiy Atle: ay -y ey. Hel weet varie yer jand puleling ' 4 1 OLY ci | | ola = ama p to 25m | 25| 25c0 Peat OS = i 2205 | 231-525 : 25 cw) 5B p50 5 tz , 2125 % is {L545 “2735 IZ 3295 2 Qaw | 2B AD agen s Bie %* i [aOLD 23496 DRVSREVNSGS { 0,545) FAMIa-tS [GAD {12% \wreas, BEACH - \ \ (Bowe i. le \rez00_ (120 eau me a Tansaeene «\ agai ena 1B cor a 1yeR 2 Aer’= B Ketwe \evahin W rat BUBLERT NE” PALO OME cence ae perme | Te ke Land. (aces — Hanns | (1 62%) (G2908) Maxbsinees (Gye) | | | Antenne Ue Cape} (1x00) } poodcht, ur RGD aw i spruces zV0 owe VokeD Revenue’ S1geoo SA2D wd) WSS d | vacant ct] | ee | Jaret | Tad vecocks vie,ecn | 28275?" 2oger £ | gash ba tax: {80,060 2ZE2S* Queo62rs| ow vate. (2% Geena | S6S2 Fu EIS, Peofir afler tex argos | Hr ere 192643254 saluage Ya? Rose we Realrintle abs i Ralane be Perea (s4poo) Qagpse) [126800 pepgre | 179698) ane orchonprate | fsy Som sufse| — S3ha) cg lap SSI tae (ogo) (2hae: 88) QUABOFR LIBS IAT ars ers] 652719) (Wows, cabtict, (19%) ]ORHS gtd) avor sH3] 2092" 624] anger zy, koe | ‘ | We '= (ie a ATA = Fee ‘Scanne wih CamScanetWarley (Gen Poe ee ye UO AQ eZ) = 20. =F tw Re yd 220.0 FS = RO A Gee ey 62) = 2a S28 Ceth. Qu-2) ve = 0 NaF Ms ate x 2) FNGe, An = NSS AO Sx 9.) = Wane AND vee AZ = \ttewrq. WZ. urese grton inte SAEZ ok tat 9p we use PRPC euchae — Peore Prats) be amos te ty Bunn) Oorchans ab + ey =a Puy Co t (reed WME bss hessard trchane HL ee . Lo = cerecen( Cycouailire | See) one ANIC CM Cas evden \oong Cotlahe Coasgidras ) Pe = Guerin feneoot antes ‘Scarne wih CamScanetTht ey *¢ eas ): Geto SOX ( kovor — Loot : = £1, ay (hos oh — (Lterog)* = rq ‘Searne wih CamScanetQUESTION TWO Loki Technologies of Chicago, Iinois is considering a three-year project in Dar Es Salaam. The project has an initial investment cost of US$20 million and has no terminal value beyond the final years cash flow. The current spot exchange rate is USS0.2/Tsh. The project’s incremental Tshs. cash flows net of income taxes are projected to be 50, 60, and 70 million Tanzania Shillings in Years 1, 2, 3 respectively. The interest rate on one-year government bonds is 5% in the United States and 8% in Tanzania. The required rate of return on the market portfolio is known to be 11% in the United States and 18% in Tanzania. A financial analyst decides the project has an all-equity beta of 1.00 vis-i-vis both the United States and Tanzanian market portfolios Required: a) What is the Project's NPV using the Decentralized Capital budgeting Technique? b) Whatis the Project's NPV using the Centralized Capital budgeting Technique?@ VECEMTeA LeED a Quewenne C000) 4 foe 15 AR Wal WLegherott Ca Caw Glas. | Is s0p00! (ce, | 40,000 DY) Dieeante cade Aes Wh yrous. ngoqh S\\225 exchance ates ue Noon) | OY O84 Ores Te Reon + | (avpoo) 873872 — qroz-72 436695 | ae j s No Pv | Msp IV261-2}, = Qordy.) FZOE-IE | OR | Niey = Ain Aaa “1 ae ot PAL | COP LR - \ Net = Veh ae mF ow “hear a ws = f TF A (sa@ oxclrangy RE Wy = Cy X/\ Eby AR br x/dteror) : : vbte ) Croeey F_Or x (tone = Seq = Oo \ boot ta 3 O-4% (\to.ac)* (oot) = 0+ \E3 | ‘Scanne wih CamScanetReeen Vy veceateelied carted Aawel geltas + = Geocek cad Clouse (HEATH CAFE = Dartort cady Heme weds geersn cok cagilad — caweck We home customer at Vrevealros Sob exchange eke ceateatred cogile@ budsellins: = Tosecark carly Glee Sh Aerotgn currency, = cond ce Whe Wome cacren ag ands Ceracatk a excsen ie He = _Dyscsdrak cory Coase airs leer eck op cepted’ SEMTRAUZED CAPTTAL, QuoeenNMT- ns beau: Ye | | va | Initial indeshits (20,000) [- Cas) Flow - Oh Go,060 |e GO,cee | Ten To, 95 Exchang ote O14 eg O18 4 Ola Root be Parent 4 V0. | Riuaio | Kirke. tune ch 18 | h(20p00)/ f BSR0% g edu! BaToA.c, BPM @rrTee) | (Serres) arene REx ___| ce ; a5 ‘Scanne wih CamScanetJUESTION THREE Kipanga Corporation currently has no existing business in German but it is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment capital required to start the project would be Euro 50 million to be used to buy plant and equipment. The plant is expected to have a useful life of 10 years and would be depreciated using a straight line method. The project would be terminated at the end of year three, when the subsidiary would be sold. Kipanga expects to receive Euros 35 million when it sells the subsidiary. This would be equal to the book value at the end of year 3. The exchange rate of the Euro is expected to be TShs 0.56 at the end of year 3. However it is estimated that the risk free interest rate in Tanzania is 12% and in German is 10%. The price, demand, and variable cost of the product in German are as follows:- Year Price(Euros) Demand Variable Cost 1 500 40,000 units Euro 30 2 Sil 50,000 units Euro 35, 3 530 60,000 units Euro 40 The fixed costs, such as overhead expenses, are estimated to be Euro 6 million per year. All cash flows received by the subsidiary are to be sent to the parent company at the end of each year. The German government would impose an income tax of 30%. In addition, it would impose a withholding tax of 10% on earnings remitted by the subsidiary. The Tanzanian Government would allow a tax credit on remitted earnings and would not impose any additional taxes. Kipanga requires a 20% rate of return on this project. Required: Should Kipanga accept the project or not? Justify your answerCAR ITAL Quo wen Mee DETAILS - To a \rikiat investoatat 2(Soj000) Dornan gd. Liv 000 LP 600 ©0000 Pete “S60 sat | So WoC. Ravenue _[PRojoooje as;000 | tt, 200 Vanatle coc: Ie 20 Qe Hor \STa® Varaste cee ooh | agp 2400 Mesh exgonses 2 Goa ace aco BePrwahe, 5.000 S000 Tee coat « 12400. | Tino Gece pene be tay: 212800 + |S [2409 . AA bacle Jax 20% 2 tro |e 2ZRmo.1€ SS20- POOR attics tox: S4#eo-le Baeo le (2 a¢0- AAD eacle hep recg -f90 £200 STsy ~ mene _ Arson 1 subsidiony |% 20460 | 1396. | tera wettWhel dae Tax, \e4 2 _fowe.| 1396 | 182 AMeENt reamed bw Genk: Je. Wat. | 126%. |2 | Gaqr- Sage values ee | 2500: ——-______|2 nary Ie Siete) Vest Sogn. Cxchang rete ye OSB. Owes. Present valve. Bad, Sq 102 2PEIy.S2. Ni pve __ | - = Y | i 7 ape — ae _ - — : ae y Fe (arn oe & (Ct 812)! (re. te)! (SS eg te Bitaenee ey ‘Sear wth CamSeannet& Oey ie Fate ve = Oty seers] O38. X Ct orr)* (1 *o+1e)" > ess:QUESTION FOUR Mr. Mawanga is a Ugandan investor who is considering investing in Tanzanian market, A local consultany firm in Dar Es salaam provided the following information to him: i) Initial investment will be TZS200 million in Year 0 ii) After tax expected cash flows in TZS from year I to Year 4 will be (millions): 100, 125, 150 and 150. iii) The current spot rate is 0.560 TZS/1.00UGS iv) The Uganda risk free rate is 6%, while it is 9% in Tanzania. a) determine the expected spot rate of exchange for the next four years between the TZS and the UGS. b) Evaluate the investment proposal to Mr. Muwanga using the Net Present Value approach.Pn 4 sak ah .. exchange +4, tte wet fouc 4s. vntesere = Use = 62 wr = 4h > OstEe Ne = ower (“4 0-04)! (40-06) * th = ore (tora) * Sa (Cp Fe10G og 1 =F owe toa’? ( Feege = 06.6048 ae ZOU (‘ be oa) * i (4 ons)?! = 0.6: ‘Scanne wih CamScanetCATAL RuDUuET er Goo) pemes [ye | x ee ee _WAWAP Wvertmrent Vr. (00,00) . CA Flay |. Neqe0 Wesco | 1S%e00 | \ 1%, 0007 Ckdhrang ac LON oer Cate] oma 0162, 4 Rornarteay « Ne Raveenyt Cetin 8e V5-24412°79.,| QM gee 42, Y4SGo|» GY “ee PAs Qscont) Ch GB sq342-€6)| 1626.82.) je ces SH 206462. 96 | 19259272. ooNPy NmNE NDI NNN Ne ead QUESTION Two / (08 MARKS) a) Briefly explain the significance of covered interest rate parity theory in the determination of forward currency rates. (02 Marks) USWAZI plc., located in Soroti, Uganda, produces frozen fruits which enjoys a large market share both in Uganda and Kenya. In order to be closer to its Kenya market, USWAZI is considering moving some of its production operations to Garissa. Operations in Garissa would begin in year 1 and after three years, the subsidiary would be sold to the Kenyan investors for KES 2,809,802.80. Other attributes are as follows: b Sales price per unit, year 1 KES 5.00 Sales price increase, per year 3.0% Initial sales volume, year 1, units 1,000,000 Sales volume increase, per year 10.0% Production cost per unit, year 1 KES 4.00 Production cost per unit increase per year 4.0% General and administrative expenses per year KES 100,000 Depreciation expenses per year KES 80,000 USWAZI's WACC 20.00% Kenya corporate tax rate 30.0% The Ugandan shilling/Kenyan shilling exchange rates (UGS/KES) are expected to be 8.00 (year 0), 9.00 (Year 1), 10.00 (Year 2) and 11.00 (Year 3). The operations in Garissa will pay 80% of its accounting profit to USWAZI as an annual cash dividend, “Ugandan taxes are calculated on grossed up dividends from foreign countries, with @ credit for host-country taxes already paid. REQUIRED: Estimate the maximum Kenyan Shilling price USWAZI should offer in year 1 for the investment. (06 Marks)TET. Or: CROITAL Quo lee Me: OE Ceofaz) PLC. _ Xo Th of Nailed Coales voluens) Aaaajage+ | 1000908 419, ¢¢00 Sales Petes wes S SS. Rovonus - $600,000 S66 SO8d [6412 a1 Pooduchen dfs ws 4 Ly i{los be 226, Pooduchin cst 400,000 | HF6,000 | 5,224,16u TK cleat legha exe: 409,060 100,060 1.49 940 Bepreciahty &o,o0a 20,000 _| Ro,aaa. Voor cost GrkG000| HAIG Série, Gute Poort by tay $20,000] 907900 | 1053.So1 \ncornn Tar © 25% Beboro:| ITI Jot an. Prot ater ter St4poo | 626200 | Tot4st. AD lace doprach Loge Go geo acco ©x4000 116200 132404. Salvage \a\ue + Q 209 ,favez Amemb be Lo eemittad Esa W423 Bwqr0+e PY 9 KEL chili 28% Susp | patyaa |2,07%, 61. = BANU DEW » i — AMenth Wve rod ‘Scanne wih CamScanet