Johnson of NJ is considering selling its luxury boats to a German company. Johns

Question

Johnson of NJ is considering selling its luxury boats to a German company. Johnson sells a boat for $98,000 which has a total cost of $81,000 per boat.   The German company can sell 15 boats per month in Europe which is priced in euros. The German company will pay Johnson 75,384 euros for each boat. The German company orders 15 boats and will pay in 90 days. The current spot exchange rate today is $1.30 per euro.

    1. What is Johnsons projected gains and losses from this proposed arrangement at the current exchange rate of $1.30 per euro. What happens if the exchange rate changes to $1.37 per euro? At what exchange rate will the company breakeven?

    2. What happens to the forward exchange rate if German interest rate is 7% and US interest rate is 2%. Does this affect the profitability of Johnson? By how much?

    3. Should Johnson pursue the international sales.? Why or why not?

2. Panam airlines hired you as a consultant to value its equity because it plans to go public soon. The company will maintain its 30% debt and that at this capital structure, debt holders will demand a return of 6% and stock holders will require 11%. Next years operating cash flow will be $68 million and that investment expenditures will be $30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4% a year. The companys tax rate is 40%

a. What is the total value of Panam airlines?

b. What is the value of the companys equity?

Explanation / Answer

a)1. Johnsons projected gains and losses from this proposed arrangement total realisation if sales made in spot would have been= 1.30*75384=97999.2 per boat if excnge rate comes to 1.37per euro then=1.37*75384=103276 net gain if exchange rate changes to 1.37 per euro= 103276-97999.2=5276$ calculation of exchange rate in which company will ne at break even= 98000/75384=1.30 2. forward rate if rate of interest in germany is 7% and us 2% 1+ rate of int of us/1+ int rate of germany= forward rate/ spot rate 1.02/1.07=forwar rate/1.30=1.4579 yes it will affect the profitabilty profit will increse by t $ =1.4579*75384-98000=11905 3.yes jone pursue the international sale because it will result in profit on sale and exchange benifit

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