Question
1.Project Information for firm ABC: Will export product to Mexico and is looking for firm to swap pesos with over life of project Time period
1.Project Information for firm ABC:
Will export product to Mexico and is looking for firm to swap pesos with over life of project
Time period of project is 4 years
After tax cash flow expected to be 1,000,000 pesos
Peso's spot rate is $0.20
Risk free annual interest rates:U.S. 6 percent, Mexico 11 percent
Interest rate parity exists
Use one year one year forward rate as predictor of exchange rate in one year
Exchange rates will change by same percentage predicted for year one in years 2 through 4
Firm XYZ will take the 1,000,000 pesos each year at an exchange rate of $0.17 per peso
Ignore taxes
ABCs details:
Capital Structure:
60 percent debt and forty percent equity
Corp. Tax rate:
30 percent
Debt financing cost:
10 percent
US expected stock returns:
18 percent
Beta:
0.9
ABC will use its cost of capital as required return on project
Determine the NPV if ABC enters into a swap agreement with XYZ and does not hedge its position.
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