Chapter 12

2. Acua Leather Goods. DeMagistris Fashion Com- pany, based in New York City, imports leather coats

from Acua Leather Goods, a reliable and longtime supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the U.S. dollar in January 2002, it collapsed in value to Ps4.0/$byOctober2002.Theoutlookwasforafurther decline in the peso's value. Since both DeMagistris and Acua wanted to continue their longtime relationship, they agreed on a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$, DeMagistris will pay based on the spot rate. If the exchange rate falls outside this range, they will share the difference equally with Acua Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be reevaluated. DeMagistris contracts to import leather coats from Acua for Ps8,000,000 or $2,000,000 at the current spot rate of Ps4.0/$ during the next six months.

a. If the exchange rate changes immediately to Ps6.00/$, what will be the dollar cost of six months of imports to DeMagistris? b. At Ps6.00/$, what will be the peso export sales of Acua Leather Goods to DeMagistris Fashion Company?

3. Manitowoc Crane (A). Manitowoc Crane (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan (renminbi) has been trading at Yuan8.20/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.00/$, after which it will remain unchanged for at least a decade. Accepting this forecast as given, Manitowoc Crane faces a pric- ing decision in the face of the impending devaluation. It may either (1) maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or (2) maintain the same dol- lar price, raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit vol- ume. Direct costs are 75% of the U.S. sales price.

a. What would be the short-run (one-year) impact of each pricing strategy? b. Which do you recommend?

Chapter 13

1. Ganado's Cost of Capital. Maria Gonzalez now esti- mates the risk-free rate to be 3.60%, the company's credit risk premium is 4.40%, the domestic beta is estimated at 1.05, the international beta is estimated at 0.85, and the company's capital structure is now 30% debt. All other values remain the same as those presented in this chapter in "Sample Calculation: Ganado's Cost of Capital." For both the domestic CAPM and ICAPM, calculate the following:

a. Ganado's cost of equity b. Ganado's cost of debt c. Ganado's weighted average cost of capital

4. Nestl of Switzerland Revisited. Nestl of Switzerland is revisiting its cost of equity analysis in 2014.As a result of extraordinary actions by the Swiss Central Bank, the Swiss bond index yield (10-year maturity) has dropped to a record low of 0.520%. The Swiss equity mar- kets have been averaging 8.400% returns, while the Financial Times global equity market returns, indexed back to Swiss francs, is at 8.820%. Nestl's corporate treasury staff has estimated the company's domestic beta at 0.825, but its global beta (against the larger global equity market portfolio) at .515.

a. WhatisNestl'scostofequitybasedonthedomes- tic portfolio of a Swiss investor? b. What is Nestl's cost of equity based on a global portfolio for a Swiss investor?