How would your answer to problem 2 change if instead of allowing refunds at 35%, the refund

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How would your answer to problem 2 change if instead of allowing refunds at 35%, the refund rate were only 25%?


Data from problem 2;

Fleur de France has a project that will provide £20 million in revenue in 1 year. The project has a euro cost of €30 million that will be paid in 1 year. The cost of the project is certain, but the future spot exchange rate is not. Assume that there are only two possible future spot exchange rates. Either the spot rate in 1 year will be €1.54/£ with 55% probability, or it will be €1.48/£ with 45% probability. Assume that the French tax rate on positive income is 45%, that a firm’s losses are immediately refunded at a rate of 35%, and that the forward rate of euros per pound equals the expected future spot rate.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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International Financial Management

ISBN: 978-0132162760

2nd edition

Authors: Geert Bekaert, Robert J. Hodrick

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