Essay on On February 26, 2015, an American Company

639 Words Aug 22nd, 2016 3 Pages
On February 26, 2015, an American company

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1. On February 26, 2015, an American company, Company A, sold an euro-denominated eight-year bond at a fixed interest rate of 1%. In comparison, a similarly rated company, Company B, sold a bond with the same maturity in the U.S. with a coupon of 2.5%. The exchange rate on February 26, 2015 was $1.1199/€. Assume that the International Fisher Effect holds true. What will be the total expected foreign exchange gain or loss for both the interest payment and the value of the bond (in percentage) for Company A each year in the next eight
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d. NPV is negative before the exchange rate change but turns positive after the exchange rate change.



3. Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., what is the expected one-year spot rate of krone per dollar according to PPP?

Your answer: Krone_______________/$

(Keep two decimals; Do include the “-” if your answer is a negative number.)

Assume that an MNE considers two alternative modes of entering a potential market abroad:

licensing and foreign direct investment. The initial investment outlays in year 0 and free cash flows

for subsequent years are presented below ($ millions):



Refer to this information for Questions 4 to 7

4. What is the IRR for the licensing alternative?


Your answer: _______________%

(Keep two decimals; Do include the “-” if your answer is a negative number.)


5. What is the NPV for FDI alternative if cost of capital for the project is 12%?


Your answer: $_______________million

(Keep two decimals; Do include the “-” if your answer is a negative number.)


6. Which alternative would you recommend if the two alternatives are mutually exclusive?


a. Licensing.

b. FDI.

c. Neither is acceptable.


7. Assume that a proposed investment project requires an initial investment of $10 million and the expected cash flow is $2 million each year for the next…

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