Question 47 (25 marks) A U.S.-based MNC is considering establishing a two-year project in New Zealand with a US$32 million initial investment. The firm's cost of capital is 13%. The required rate of return on this project is 15%. The project is expected to generate cash flows of NZ$15 million in Year 1 and NZ$35 million in Year 2, and is expected to have a salvage value of NZ$30,000,000 Assume no taxes, and a stable exchange rate of $0.60 and $0.63 per NZ$ in year 1 and 2 respectively. All cash flows are remitted to the parent. Required: i) Calculate the US$ cash flows remitted to the parent company each year over the life of the project. (5 marks) ii) Calculate the present value of the US$ cash flows to the parent. (9 marks) iii) Calculate the Net Present Value of the project. (4 marks) iv) Should the MNC accept the project? Justify your response. (2 marks) b) Abkon Co. is a Swedish firm anc, borrows funds at an interest rate of 10% per year. Its beta is 1.0 and the long-term annualized risk-free rate in the Sweden is 6%. The stock market return in Sweden is expected to be 15% annually. Abkon Co. target capital structure is 45% debt and it is subject to a 30% corporate tax rate. Estimate the company's cost of capital. (5 marks) SECTION D - 50 marks Instructions: This section consists of two (2) computational problems with marks as indicated. Answer both questions in the answer booklet provided, showing all workings. (Suggested time: 40 minutes) QUESTION 46 (25 marks) Brooks Inc., has future receivables of 4,000,000 New Zealand dollars (NZ$) in one year. It must decide whether to use options or a money market hedge to hedge this position. Showing and explaining all your workings, illustrate whether Brooks Inc. would be better off using an options hedge or a money market hedge. Give reasons for your conclusion. Spot rate of NZ$=$.54 One-year call option: Exercise price = $.50; premium = $.07 One-year put option: Exercise price = $.52; premium = $.03 One-year deposit rate One-year borrowing rate U.S. 9% 11% New Zealand 6% 8% Forecasted spot rate of NZ$ Rate Probability $.50 20% $.51 $.53 30% 50%