45. New Hampshire Corp. has decided to issue three-year bonds denominated in 5,0

Question

45. New Hampshire Corp. has decided to issue three-year bonds denominated in 5,000,000 Russian rubles at par. The bonds have a coupon rate of 17%. If the ruble is expected to appreciate from its current level of $.03 to $.032, $.034, and $.035 in years 1, 2,and 3, respectively, what is the financing cost of these bonds?
a. 17%.
b. 23.18%.
c. 22.36%.
d. 23.39%.

46. FAB Corporation will need 200,000 Canadian dollars (C$) in 90 days to cover a payable position. Currently, a 90-day call option with an exercise price of $.75 and a premium of $.01 is available. Also, a 90-day put option with an exercise price of $.73 and a premium of $.01 is available. FAB plans to purchase options to hedge its payable position. Assuming that the spot rate in 90 days is $.71, what is the net amount paid, assuming FAB wishes to minimize its cost?
a. $144,000.
b. $148,000.
c. $152,000.
d. $150,000.

47. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium.
a. $1,169,000.
b. $1,099,000.
c. $1,106,000.
d. $1,143,100.
e. $1,134,000.


48. When a foreign currency is perceived by a firm to be ____, the firm will probably ____ direct foreign investment in that country.
a. undervalued; consider
b. undervalued; not consider
c. overvalued; not consider
d. A and C
e. B and C


49. The cost of capital can vary among countries because:
a. MNCs based in some countries do not have a competitive advantage over others.
b. MNCs may be able to adjust their international operations and sources of funds to capitalize on differences in the cost of capital among countries.
c. of country differences in tax laws or monetary supply.
d. none of the above.


50. Zoro Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on the stock market overall is expected to be 13%. What is the required rate of return on Zoro stock?
a. 21%.
b. 41%.
c. 16%.
d. 13%.
e. none of the above

Explanation / Answer

(45)

[(0.032 – 0.03) / 0.03] = 0.0666667

[(0.034-0.032) / 0.032] = 0.0625

[(0.035 – 0.034) / 0.034] = 0.02941176470

[(0.0666667+ 0.0625 + 0.02941176470) / 3] = 0.052859488233

Financing Cost of theses bonds = [0.17 + 0.052859488233]

Financing Cost of the bonds = 0.222859488233 (or) 22.29%

Financing Cost of the bonds = 22.29%

The correct Option (C) 22.36% (approximately)

(48)

When a foreign currency is perceived by a firm to be undervalued, the firm will probably consider direct foreign investment in that country.

Hence, the correct option is (a) Undervalued; consider

(49)

The cost of capital can vary among countries because MNCs may be able to adjust their international operations and sources of funds to capitalize on differences in the cost of capital among countries.

The correct options are (b) MNC s may be able to adjust their international operations and sources of funds to capitalize on differences in the cost of capital among countries.

(50)

Stock Beta () = 2.0

Required Return (RE) = ?

Risk-free rate of return (Rf) = 5%

Expected Rate of Return on the Stock Market (RM) = 13%

RE = Rf + (RM – Rf)

     = 5% + 2.0 (13% – 5%)

     = 0.05 + 2.0 (0.08)

     = 0.05 + 0.16

     = 0.21 (or) 21%

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