First Semester, 2008

the Tutorial7-2 answer. Please answer the tutorial within 1 hour.

FIN5IFM: International Financial Management Tutorial 7 Topic 5 Equity: Concepts and Techniques Topic 6 Global Bond Investing 1. A company can generate an ROE of 12% and has an earnings retention ratio of 0.80. Next year's earnings are projected at $100 million. If the required rate of return for the company is 10%, what is the company's tangible PE value, franchise factor, growth factor, and franchise PE value? 2. What is the difference between a foreign bond and an international bond? 3. You hold a bond with a duration of 17. Its yield is 6% while the cash (one-year) rate is 4%. You expect yields to move down by 10 basis points over the year. a. Give a rough estimate of your expected return. b. What is the risk premium on this bond? 4. An investor is considering investing in one-year zero-coupon bonds. She is thinking of investing in either a pound-denominated bond with a yield of 5.2% or a euro-denominated bond with a yield of 4.5%. the current exchange rate is 1.5408/. a. What exchange rate one year later is the break-even exchange rate, which would make the pound and euro investments equally good ? b. Which investment would have turned out to be better if the actual exchange rate one year later is 1.4120/. 5. Let's consider the NKK dual-currency bond shown in Exhibit 7.3. It is a bond quoted in yen at 101%. What would happen to the market price if the following scenarios took place? a. The market interest rate on (newly issued) yen bonds drops significantly. b. The dollar drops in value relative to the yen. c. The market interest rate on (newly issued) dollar bonds drops significantly. d. Would you give the same answers if the same bond were quoted in dollars? 6. You purchase an international bond in euros, at a quoted price of 101.5%. The annual coupon on the bond is 6%, and we are exactly one month after the past coupon date. You buy 100,000 of nominal value of this bond. What is your total expense? 7. A company without default risk can issue a perpetual FRN at LIBOR. The coupon is paid and reset semi-annually. It is certain that the issuer will never have default risk and will always be able to borrow at LIBOR. The FRN is issued on November 1, 2005, when the six-month LIBOR is at 4.5%. On May 1, 2006, the six-month LIBOR is at 5%. a. What is the coupon paid on May 1, 2006, per $1,000 bond? b. What is the new value of the coupon set on the bond? c. On May 2, 2006, the six-month LIBOR has dropped to 4.9%. What is the new value of the FRN