9. Pupule Travel. Pupule Travel, a Honolulu, Hawaii-based 100% privately owned travel company, has signed an agreement to acquire a 50% ownership share of Taichung Travel, a Taiwan-based privately owned travel agency specializing in servicing inbound customers from the United States and Canada. The acquisition price is 7.4 million Taiwan dollars (NT$7,400,000) payable in cash in three months. Thomas Carson, Pupule Travel's owner, believes the Taiwan dollar will either remain stable or decline slightly over the next three months. At the present spot rate of NT$33.96/$, the amount of cash required is only $211,429, but even this relatively modest amount will need to be borrowed personally by Thomas Carson. Taiwanese interest-bearing deposits by non-residents are regulated by the government, and are currently set at 1.4367% per year. He has a credit line with Bank of Hawaii for $210,000 with a current borrowing interest rate of 8.0213% per year. He does not believe that he can calculate a credible weighted average cost of capital since he has no stock outstanding and his competitors are all also privately held. Since the acquisition would use up all his available credit, he wonders if he should hedge this transaction exposure. He has the following quotes from the Bank of Hawaii: 6. Analyze the costs and risks of each alternative, and then make a recommendation as to which alternative Thomas Carson should choose. How much in U.S. dollars will Pupule Travel pay in 3 months without a hedge if the expected spot rate in 3 months is assumed to be NT$33.96/$? $ (Round to the nearest cent.) How much in U.S. dollars will Pupule Travel pay in 3 months without a hedge if the expected spot rate in 3 months is assumed to be NT$32.96/$? $ (Round to the nearest cent.) How much in U.S. dollars will Pupule Travel pay in 3 months with a forward market hedge? $ (Round to the nearest cent.) How much in U.S. dollars will Pupule Travel pay in 3 months with a money market hedge? $ (Round to the nearest cent.) "With a money market hedge, Pupule Travel would have to exchange the money up front. It would require the firm to borrow the money and thus increase the debt outstanding for the entire 3 months. Therefore, the forward contract appears to be the preferable choice, protecting the firm against an appreciating Taiwan dollars, and creating a certain cash purchase payment. The problem, however, will be whether the Bank of Hawaii will allow the firm to purchase a forward for the full $224,514.56, which is slightly above the credit line currently in place. If his relatonship with the bank is good, they most likely would increase his line sufficiently to allow the forward contract." The above statement is (1) (Select from the drop-down menu.) 6: Data Table Spot rate (NT$/$) 33.96 3-month forward rate (NT$/$) 32.96 Annual Taiwan dollar deposit rate 1.4367% Annual dollar net borrowing rate 6.5846% 3-month call option on NT$ not available Click on the icon located on the top-right corner of the data table in order to copy its contents into a spreadsheet. (1) O false true