1)Petrus Company has a unique opportunity to invest in a two-year project in Aus
ID: 2666784 • Letter: 1
Question
1)Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest $1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $.55 and $.60, respectively?
a. $2,905,817.
b. -$94,183.
c. $916,128.
d. none of the above
2)
Werner Corporation has a target capital structure that consists of 40% debt and 60% equity. Werner can borrow at an interest rate of 10%. Also, Werner has determined its cost of equity to be 14%. Werner's tax rate is 40%. What is Werner's weighted average cost of capital?
a. 10.80%
b. 12.40%
c. 9.20%
d. None of the above
3)
Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecasts that its earnings next year will be €10 million. Mercury decides to hedge the expected earnings by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidated earnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.
a. favorably; favorably
b. favorably; adversely
c. adversely; favorably
d. adversely; adversely
please explain full ans it is my Final exam need right ans
Explanation / Answer
1) First year $ generated = 1000000*0.55 = 550000 ($) 2nd year $ generated = 2000000*0.60 = 1200000 ($) Investment = 1500000 ($) NPV = -1500000 +550000/1.14 +1200000/1.14^2 = -94182.8 = say - 94183 ($) Hence, ANSWER is OPTION b, - $ 94183 2) WACC = We*Ke + Wd*Kd(1-T) => = 0.6*14 + 0.4*10(1-0.4) = 10.8 % Hence, ANSWER is OPTION a, 10.8%. 3) ANSWER is OPTION b, favorably (on earnings) and adversely (on hedge)
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