1. According to the Wall Street Journal, the yield on the 10-year U.S. Treasury bond soared from 1.669% on Feb 2, 2015 to 2.141% on February 17, 2015.1 Assume the coupon rate and the bond yield were the same on Feb. 2, 2015; maturity maintains to be 10 years; the face value of the bond is $1,000; and interest payment is semiannual.
a. How much did the bond value from Feb. 2, 2015 to Feb. 17, 2015?
b. According to the U.S. Treasury, by the end of November 2014, China's holding of U.S. Treasury securities was about $1,250 billion.2 Assume that the average maturity of China's holding is 10 years. From Feb. 2, 2015 to Feb. 17, 2015, how much did the value of China's holding change?
2. If a U.S.-based firm borrows Sfr 1,500,000 for one year at 5.00% and during the year the Swiss franc appreciates from an initial rate of Sfr1.00/$ to Sfr0.90/$.
a. What is the dollar cost of this debt?
b. How is the foreign exchange transaction cost of the debt?
c. Assume that the corporate tax rate for the firm is 34%. What is the after-tax cost of this debt?
d. Assume that (1) the firm has debt/equity ratio of 1; (2) its cost of equity is 15%, and (3) the cost of this Swiss franc debt is representative of its cost of debt. What is the firm's weighted average cost of capital?
3. Kashmiri is the largest and most successful specialty goods company based in Bangalore, India. It has not entered the North American marketplace yet, but is considering establishing both manufacturing and distribution facilities in the United States through a wholly owned subsidiary. It has approached two different investment banking advisors, Goldman Sachs and Bank of New York, for estimates of what its costs of capital would be several years into the future when it planned to list its American subsidiary on a U.S. stock exchange. Using the following assumptions by the two different advisors, calculate the prospective costs of debt, equity, and the WACC for Kashmiri (U.S.):