Q 1 Manufacturing USA has just signed a contract to buy equipment from German Car Industry, for 5,000,000 euros. The purchase was made in April with payment due three months later in July. Manufacturing USA's CEO is considering hedging strategies to reduce the exchange rate risk arising from the purchase. To help the CEO make a hedging decision the following info has been gathered.
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Spot exchange rate
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$1.13/ euros
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Manufacturing USA's Weighted Cost of CApital
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12%
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Euro zone annual borrowing rate
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6%
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Euro zone annual investment rate
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4%
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US annual borrowing rate
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9%
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US annual investment rate
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7%
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July put options for 5,000,000 euros; strike price $1.17, premimum price is $0.022/ euros.
July call options for 5,000,000 euros: strike price $1.17, preimium price is $0.014/ euros.
July forward rate on Euros is $1.147/ euros.
1)What is the total cost ($) for the 5,000,000 euros payment with a money market hedge in July?
2)What is the total cost ($) for the 5,000,000 euros payment with an option hedge in July if the exchange rate become $1.14/euros?
3)What is the total cost ($) for the 5,000,000 euros payment with a forward hedge in July if the ex
(Q.2) Twenty-five-year B-rated bonds of Parker Optical Company were initially issued at a 12 percent yield. After 5 years, the bonds have been upgraded to Aa2. Such bonds are currently yielding 8 percent to maturity. Use Table 16-2. Determine the price of the bonds with 20 years remaining to maturity. Table 16--
(Q-3) Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, Strauss & Glazer Parts (SGP). Raymond's analysts project that the merger will result in the following free cash flows and interest expenses. After Year 4, both free cash flows and interest expenses will grow at constant rate of 4%.
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Year
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1
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2
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3
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4
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Free cash flows
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$100
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$300
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$300
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$500
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Interest expense
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10
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10
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15
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20
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Assume that all cash flows occur at the end of the year. SGP has 2 million shares outstanding and a target capital structure consisting of 40% debt and 60% common equity. . Cost of debt is 10%. SGP's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%.
Using a APV method, answer the following questions.
Which discount rate should be used to value of the tax shields of SGP?
What is the total corporate value of SGP to Raymond Supply Corporation?
(Q-4) Baywatch Industries has owned 80 percent of Tubberware Corporation for many years. On January 1, 20X6, Baywatch paid Tubberware $222,000 to acquire equipment that Tubberware had purchased on January 1, 20X3, for $249,000. The equipment is expected to have no scrap value and is depreciated over a 15-year useful life. Baywatch reported operating earnings of $110,000 for 20X8 and paid dividends of $45,000. Tubberware reported net income of $42,000 and paid dividends of $24,000 in 20X8.
Compute the amount reported as consolidated net income for 20X8.
Prepare the consolidation entry or entries required to eliminate the effects of the intercompany sale of equipment in preparing a full set of consolidated financial statements at December 31, 20X8.
(Q-5) Consider the following information: Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom .18 .353 .453 .333 Good .42 .123 .103 .173 Poor .32 .013 .023 −.053 Bust .08 −.113 −.253 −.093 Requirement 1: Your portfolio is invested 29 percent each in A and C and 42 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Expected return of the portfolio % Requirement 2: (a) What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places (e.g., 32.16161).) Variance of the portfolio (b) What is the standard deviation of this portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Standard deviation %
(Q-6) This problem concerns the effect of taxes on the various break-even measures. Consider a project to supply Detroit with 25,000 tons of machine screws annually for automobile production. You will need an initial $2,400,000 investment in threading equipment to get the project started; the project will last for five years. The accounting department estimates that annual fixed costs will be $800,000 and that variable costs should be $200 per ton; accounting will depreciate the initial fixed asset investment straight-line to zero over the five-year project life. It also estimates a salvage value of $440,000 after dismantling costs. The marketing department estimates that the automakers will let the contract at a selling price of $300 per ton. The engineering department estimates you will need an initial net working capital investment of $240,000. You require a return of 16 percent and face a marginal tax rate of 38 percent on this project. Calculate the accounting, cash, and financial break-even quantities.
(Q-7) what are the risks that a business owner/bank manager would need to be legitimately concerned with
(Q-8) Compute the total Medicare tax for the following taxpayers. If required, round your answers to the nearest dollar. Mario, who is single, earns wages of $440,000 in 2015. His total Medicare tax is $____?
(Q-9) Liabilities $216 Equity 54 Total $270 Total $270 The duration of the assets is 8 years and the duration of the liabilities is 6.2 years. The bank is expecting interest rates to fall from 10 percent to 9 percent over the next year.
a. What is the duration gap for Hedge Row Bank?
b. What is the expected change in net worth for Hedge Row Bank if the forecast is accurate?
c. What will be the effect on net worth if interest rates increase 100 basis points?
d. If the existing interest rate on the liabilities is 6 percent and that on the assets is 10 percent, what will be the effect on net worth of a 1 percent increase in interest rates?
(Q-10) On January 1, 2015, Warren Corporation had 1,000,000 shares of common stock outstanding. On April 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On November 1, the corporation purchased on the market 500,000 of its own outstanding shares and retired them.
Instructions
Compute the weighted average number of shares to be used in computing earnings per share for 2015. (round to the whole share if necessary)