Kito Co. is an American company that imports supplies from Australia an equivalent of 12 million USD in AUD per year. Meanwhile all sells are invoiced in U.S. dollars. They anticipate revenues of $20 million per year, being half of the revenue from sales to customers in Australia. The current spot rate is 1 USD/AUD, but it is likely that it will depreciate by 20%.

Kito Co. is planning a new project that will expand its sales. Kito can finance the project with a five-year loan. The principal will be paid at the end of the term. The loan corresponds to 10 million USD or its equivalent in AUD at an annual interest rate of 15% in the US or 9% if the loan is in AUD. So if Kito wants to use financing that will reduce its exposure to exchange rate risk, what is the optimal form of financing: (1) borrowing USD, (2) borrowing AUD, or (3) borrowing one-half of the funds from each of these sources?. What is the cash flow sensitivity of the optimal decision?

	Scenario 1	Scenario 2
USD/A$	1	0.8
Sales
(1) U.S.	10,000,000	10,000,000
(2) AUSTRALIA	10,000,000	10,000,000
(3) Total	20,000,000	20,000,000
Cost of materials:
(4)AUSTRALIA
(5) Total
Interest
(6) U.S.:
(7) AUSTRALIA
(8) Total
(9) Net cash flow
Percentual change of USD/AUD
Percentual change of NCF
NCF Sensitivity

Answer rating: 100% (QA)

Based on the information provided If Kito borrows USD it will face higher interest rate of 15 and fo... View the full answer