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Rodgers Corporation is looking to borrow funds to finance its working capital needs Answer

Rodgers Corporation is looking to borrow funds to finance its working capital needs Answer

Rodgers Corporation is looking to borrow funds to finance its working capital needs Answer

1.Rodgers Corporation is looking to borrow funds to finance its working capital needs in the first year of operations and has received the following five borrowing quotes from its bank:
Borrow U.S. dollars (USD) at 10.0% p.a.
Borrow Chinese yuan (CNY) at 9.0% p.a.
Borrow British pounds (GBP) at 5.75% p.a.
Borrow Lithuanian litas (LTL) at 12.5% p.a.
Borrow Latvian lats (LVL) at 14.5% p.a.

Assume that any foreign currency liability would remain uncovered. Over the year the firm is forecasting that the Chinese yuan will appreciate against the U.S. dollar by 1%, the British pound will appreciate by 4%, the Lithuanian litas will depreciate by 2%, and the Latvian lat will depreciate by 4%.

a.What is the projected cost of borrowing in each currency? If the firm’s goal is to minimize interest expense, in which currency should it borrow?

b. Assume the same scenario except that now Rodgers is looking to invest funds for one year. If the firm’s goal is to maximize its interest income, in which currency should it invest?

2. Assume that same borrowing rates as presented in part 1 but now any foreign currency borrowing would be hedged with a forward contract. The current spot rates and 12-month forward rates for each foreign currency are listed below:

Spot CNY/USD 6.0496 USD/GBP 1.6469 LTL/USD 2.4857 USD/LVL 0.5383
Forward CNY/USD 5.9916 USD/GBP 1.7135 LTL/USD 2.5400 USD/LVL 0.5180

a.What would be the effective cost of borrowing in each currency? If the firm’s goal is to minimize interest expense, in which currency should it now borrow?
b. Assume the same scenario except that now Rodgers is looking to invest funds for one year. If the firm’s goal is to maximize its interest income, in which currency should it invest?

3. You have been asked to evaluate a small sample of equity investments that your company has made over the past year and have collected the following information:

a. One year ago the company purchased shares of Hungarian Electric common stock at a price of HUF (Hungarian forint) 7,654 per share. The spot rate at the time was HUF/USD 178.5714. The stock price is now HUF 8,765 per share and the spot rate is HUF/USD 217.3913. What was the percentage return or loss on the investment for the year?

b. Last year the company purchased shares of Australian Gold Mine common stock at a price of AUD (Australian dollar) 42.00 per share. The spot rate at the time was USD/AUD 1.1012. The stock price is now AUD 42.00 per share and the spot rate is USD/AUD 0.8858. What was the percentage return or loss on the investment for the year?

c. Last year the company purchased shares of South African Telecom common stock at a price of ZAR (South African rand) 500 per share. The spot rate at the time was ZAR/USD 10.7629. The stock price is now ZAR 400 per share and the spot rate is ZAR/USD 6.9252. What was the percentage return or loss on the investment for the year?

d. Last year the company purchased shares of Volkswagen common stock at a price of EUR 65.63 per share. The exchange rate at the time was USD/EUR 1.3210. The stock price is now EUR 63.70 per share and the spot rate is USD/EUR 1.3610. What was the percentage return or loss on the investment for the year?

4. Rodgers International just purchased a Canadian company for CAD (Canadian dollar) 1,000,000. The spot rate is USD/CAD 1.0826. The inflation rate in Canada is expected to be 6% next year and in the U.S. it is expected to be 4%. Rodgers believes that it will be able to sell the company after one year for CAD 1,150,000.

a. Assuming that the spot exchange rate will adjust according to purchasing power parity and that the company uses an 18% discount rate for international capital budgeting projects, what is the net present value of this investment?

b. Assume the same situation as in part A but now the firm has found some unexpected cheap financing that changes the firm’s financing rate for international capital budgeting projects to 12%. What is the net present value of the investment in this scenario?

5. Rodgers International just purchased a Mexican company for MXN (Mexican peso) 10,000,000. The spot rate is MXN/USD 13.1579. The nominal interest rate in Mexico is expected to be 8% next year and in the U.S. it is expected to be 4%. Rodgers believes it will be able to sell the company after one year for MXN 11,500,000.

a. Assuming that the spot exchange rate will adjust according to the International Fisher equation and that the company uses an 18% discount rate for international capital budgeting projects, what is the net present value of this investment?

b. Assume the same situation as in part A but now the firm has found some unexpected cheap financing that changes the firm’s financing rate for international capital budgeting projects to 12%. What is the net present value of the investment in this scenario?

Example Set

1.A U.S.-based multinational needs to borrow funds for one year to finance its working capital needs. You have received the following five borrowing quotes from UBS:

Borrow U.S. dollars (USD) at 5% p.a.
Borrow Russian rubles (RUB) at 14.5% p.a.
Borrow New Zealand dollars (NZD) at 4% p.a.
Borrow Taiwanese dollars (TWD) at 1.5% p.a.
Borrow Kuwaiti dinar (KWD) at 6% p.a.

Assume that if foreign currency is borrowed, the liability will stay uncovered. Over the year you expect the Russian ruble to depreciate against the U.S. dollar by 8.25%, the New Zealand dollar to appreciate by 1%, the Taiwanese dollar to appreciate by 3.5%, and the Kuwaiti dinar to depreciate by 1%.

What is the projected cost of borrowing in each currency? If the firm’s goal is to minimize interest expense, in which currency should it borrow?

2. Reexamine the situation above under the assumption that any foreign currency liability would be hedged with a forward contract. The current spot rates and 12-month forward rates for each foreign currency are listed below:
Spot RUB/USD 30.1660 USD/NZD 0.7142 TWD/USD 32.3730 USD/KWD 3.4855
Forward RUB/USD 32.9361 USD/NZD 0.7221 TWD/USD 31.2930 USD/KWD 3.4598
What would be the effective cost of borrowing in each currency? If the firm’s goal is to minimize interest expense, in which currency should it now borrow?

3.A U.S.-based multinational has $50,000,000 that it wishes to deposit for one year. You have received the following deposit quotes from UBS:

Deposit U.S. dollars (USD) at 5% p.a.
Deposit Russian rubles (RUB) at 14.5% p.a.
Deposit Kuwaiti dinar (KWD) at 6% p.a.

Assume that if a foreign currency is deposited, the investment will remain uncovered. Over the year you expect the Russian ruble to depreciate against the U.S. dollar by 8.25% and the Kuwaiti dinar to depreciate by 1%.

a. What is the projected return from investing in each currency? If the firm’s goal is to maximize interest income, in which currency should it invest?

b. Reexamine the situation above under the assumption that any foreign currency deposit would be hedged with a forward contract. The current spot rates and 12-month forward rates for each foreign currency are listed below:

Spot RUB/USD 30.1660 USD/KWD 3.4855
Forward RUB/USD 32.9361 USD/KWD 3.4598

What would be the effective return from investing in each currency? If the firm’s goal is to maximize interest income, in which currency should it make its deposit?

4. Last year you purchased shares of Sony common stock at a price of JPY 3,144 per share. The spot rate at the time was JPY/USD 96.89. The stock price is now JPY 2,744 per share and the spot rate is JPY/USD 92.54. What was the percentage return on your investment for the year?

5. Last year you also purchased shares of Philips Electronics common stock at a price of EUR 28.54 per share. The spot rate at the time was USD/EUR 1.2749. The stock price is now EUR 27.88 per share and the spot rate is USD/EUR 1.4355. What was the percentage return on your investment for the year?

6. Rodgers International just purchased a British company for 1,000,000 British pounds. The spot exchange rate is USD/GBP 1.5307. Inflation in Great Britain is expected to be 4% next year and in the U.S. it is expected to be 3%. Rodgers believes it will be able to sell the company after one year for 1,150,000 British pounds. Assuming that the exchange rate will adjust based on purchasing power parity and that the company uses a 12% discount rate for capital budgeting projects, what is the net present value of this investment? Should they make the investment?

7. Rodgers International just purchased a Mexican company for 1,000,000 Mexican pesos. The spot exchange rate is MXN/USD 12.5313. Inflation in Mexico is expected to be 8% next year and in the U.S. it is expected to be 3%. Rodgers believes it will be able to sell the company after one year for 1,200,000 Mexican pesos. Assuming that the exchange rate will adjust based on purchasing power parity and that the company uses a 16% discount rate for capital budgeting projects, what is the net present value of this investment? Should they make the investment?

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Rodgers Corporation is looking to borrow funds to finance its working capital needs Answer

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