Question: A. Calamata Corporation wants to determine what kind of debt it should issue, and how much. The treasurer has built a model to simulate the pro-forma for the firm, and found that the company has significant exposure to foreign exchange risk, specifically, they have mostly US dollar revenues even though the company's entire operations are funded in Euros.
1. Assuming the costs are similar, should the company likely fund itself using dollar-based debt, or Euro-based debt?
2. What analysis should the treasurer perform with the pro-forma to determine the correct debt level for the company?
B. Apex Industries has been considering the purchase of 10 trucks to deliver their own products, which would save them $100,000 per year in shipping costs if they purchased the trucks today, and has an estimated present value of $1,500,000. Boris and Fanghua are two students working for Apex. Boris suggests that the company go ahead with the plan, since the deal is positive NPV. Fanghua suggests that maybe they should wait, and re-evaluate the proposal next year.
1. Provide an explanation why Fanghua may be right, using a numerical example.
2. Explain why Boris may be right, also providing a numerical example.