Lucky 13 Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City. A
Question:
Lucky 13 Jeans of San Antonio, Texas, is completing a new assembly plant near Guatemala City. A final construction payment of Q8,400,000 is due in six months. ("Q" is the symbol for Guatemalan quetzals.) Lucky 13 uses 20% per annum as its weighted average cost of capital. Today's foreign exchange and interest rate quotations are as follows:
Construction payment due in 6 months (A/P, quetzals)...............8,400,000
Present spot rate (quetzals/$)...............................................7.0000
6-month forward rate (quetzals/$).........................................7.1000
Guatemalan 6-month interest rate (per annum)........................14.000%
U.S. dollar 6-month interest rate (per annum)..........................6.000%
Lucky 13's weighted average cost of capital (WACC).............20.000%
Lucky 13's treasury manager, concerned about the Guatemalan economy, wonders if Lucky 13 should be hedging its foreign exchange risk. The manager's own forecast is as follows:
Highest expected rate (reflecting a significant devaluation)...........8.0000
Expected rate.................................................................7.3000
Lowest expected rate (reflecting a strengthening of the quetzal).....6.4000
What realistic alternatives are available to Lucky 13 for making payments? Which method would you select and why?
Cost Of CapitalCost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Fundamentals of Multinational Finance
ISBN: 978-0205989751
5th edition
Authors: Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman