A U.S. firm is evaluating a possible 1-year capital investment in Mexico. The U.S. and Mexico...

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A U.S. firm is evaluating a possible 1-year capital investment in Mexico. The U.S. and Mexico have signed a tax treated that calls for the use of the credit method to compute taxes on foreign investment. Project cash flows and other information are given below: Year Free Cash Flow (MP) Spot Exchange Rate Inflation Cost of debt Risk-free rate Equity risk premium Beta Debt to capital ratio Tax Rates 0 (MP100,000) $0.10/MP $1.100/€ $1.102/€ $1.106/€ $1.113/€ Receipts US 2% 5% 1% 6% 1.5 40% 40% Netherlands France Sweden Belgium Total Disbursements 1. Compute the cost of equity in USD terms. 2. Compute the wacc in USD terms. 3. Determine the wacc in Mexican Peso terms. 4. Without forecasting the expected spot exchange rate in one year, compute the Net Present Value of the project in USD. 5. You have forecast the expected spot exchange rate for next year to be $0.70/MP. Compute the Net Present Value in USD, and provide your recommendation for the project. 1 On May 1, the U.S. firm Larkin Hydraulics sold a turbine to the Dutch firm Rebecke-Terwillerger for €4,000,000 with payment due in 90 days. MP150,000 Exchange Rate Quotes Spot Rate 1-month Forward Rate 3 month Forward Rate 6-month Forward Rate Work the following questions assuming that the spot exchange rate in 90 days is $0.950/€. 6. Compute the unhedged value of the receivable. 7. Compute the hedged value of the receivable using the appropriate forward hedge. 8. Compute the hedged value of the receivable using a money market hedge. 9. Compute the hedged value of the receivable using the appropriate options hedge. Mexico 8% 30% Netherlands Money Market Rates (annualized) US Borrowing Rate 12.0% Investing Rate 10.0% 6 2 1 9 A multinational corporation with offices in the Netherlands, France, Sweden, and Belgium has average daily cash flows as shown in the table below. The cash flows are in $-millions. Netherlands 8.0% 7.0% Disbursements France 8 0 2 10 Sweden 7 4 Option Quotes 5 16 Call Put Exercise Premium $1.100/€ $0.0151/€ $1.100/€ $0.0286/€ Belgium Total Receipts 4 2 3 9 19 12 5 8 44 10. Show the cash flows (in a diagram) that would result if this firm were to use a system of Bilateral Cash Netting. 11. Show the cash flows (in a diagram) that would result if this firm were to use a system of Multilateral Cash Netting. A U.S. firm is evaluating a possible 1-year capital investment in Mexico. The U.S. and Mexico have signed a tax treated that calls for the use of the credit method to compute taxes on foreign investment. Project cash flows and other information are given below: Year Free Cash Flow (MP) Spot Exchange Rate Inflation Cost of debt Risk-free rate Equity risk premium Beta Debt to capital ratio Tax Rates 0 (MP100,000) $0.10/MP $1.100/€ $1.102/€ $1.106/€ $1.113/€ Receipts US 2% 5% 1% 6% 1.5 40% 40% Netherlands France Sweden Belgium Total Disbursements 1. Compute the cost of equity in USD terms. 2. Compute the wacc in USD terms. 3. Determine the wacc in Mexican Peso terms. 4. Without forecasting the expected spot exchange rate in one year, compute the Net Present Value of the project in USD. 5. You have forecast the expected spot exchange rate for next year to be $0.70/MP. Compute the Net Present Value in USD, and provide your recommendation for the project. 1 On May 1, the U.S. firm Larkin Hydraulics sold a turbine to the Dutch firm Rebecke-Terwillerger for €4,000,000 with payment due in 90 days. MP150,000 Exchange Rate Quotes Spot Rate 1-month Forward Rate 3 month Forward Rate 6-month Forward Rate Work the following questions assuming that the spot exchange rate in 90 days is $0.950/€. 6. Compute the unhedged value of the receivable. 7. Compute the hedged value of the receivable using the appropriate forward hedge. 8. Compute the hedged value of the receivable using a money market hedge. 9. Compute the hedged value of the receivable using the appropriate options hedge. Mexico 8% 30% Netherlands Money Market Rates (annualized) US Borrowing Rate 12.0% Investing Rate 10.0% 6 2 1 9 A multinational corporation with offices in the Netherlands, France, Sweden, and Belgium has average daily cash flows as shown in the table below. The cash flows are in $-millions. Netherlands 8.0% 7.0% Disbursements France 8 0 2 10 Sweden 7 4 Option Quotes 5 16 Call Put Exercise Premium $1.100/€ $0.0151/€ $1.100/€ $0.0286/€ Belgium Total Receipts 4 2 3 9 19 12 5 8 44 10. Show the cash flows (in a diagram) that would result if this firm were to use a system of Bilateral Cash Netting. 11. Show the cash flows (in a diagram) that would result if this firm were to use a system of Multilateral Cash Netting.

Answer rating: 100% (QA)

1 Compute the cost of equity in USD terms To compute the cost of equity we can use the capital asset pricing model CAPM Cost of Equity Riskfree rate B... View the full answer