Charles Corporation sells its product for $50/unit with variable costs at $29/unit. Its fixed costs are $250,000 a year. If Charles Corporation relaxes its credit standards it expects the following effects: a 13% increase in unit sales; an increase in the average collection period from 29 days to 37 days, inventory level will increase from $30,330 to $41,200, and an increase in bad debt expense from 2 to 3.5% of sales. Charles Company currently sells 27,000 units all on credit and has a required return on investment of 14%. Required: Assess the costs & benefits of the proposed decision. Based on your assessment should the company relax its credit standards? Assume a 365-day year. (Round your numbers to one dollar)

Question #

The 3N Inc. is unlevered and is valued at $640,000. Its current beta is equal to 1.2. The risk free rate is 4% and the market risk premium is 6%. 3N is currently deciding whether including debt in its capital structure would increase its value. Under consideration is issuing $300,000 in new debt with an 8% interest rate. 3N would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and its effective marginal tax bracket is 35%. What will 3Ns new WACC be?

Question #.

2 independent cases (22 points)

I. Assume the following spot and forward rates for the New Zealand dollar (US$/NZD).

Spot Rate US$ 0.6317 per NZD

30-day forward rate US$ 0.6330 per NZD

90-day forward rate US$ 6353 per NZD

a) Suppose you issued a 30-day forward contract to exchange 200,000 New Zealand dollars into U.S. dollars. How many U.S. dollars do you get? b) What is the 30-day forward discount/premium? Is the NZD selling at a discount or a premium?

II. Suppose a Swedish krona sells for $0.1625 and a British pound sells for $1.6523. What is the exchange rate (cross rate) of the Swedish krona to the British pound? That is, how many Swedish kronas are equal to one British pound?

Question #

ZZ Company is considering a cash acquisition of RAK Mining Co. for $2.5 million. RAK will provide the following pattern of cash inflows for the next 10years. After year 10 cash flows will grow at a rate of 4% per year. Also, at the end of year 15 Dubai Co. will need to spend $500,000 to restore the used land and forest.

Years

14 510

Cash inflow (after tax)....................... $200,000 $240,000

Required: If the cost of capital for Dubai firm is 9 percent. Should the acquisition be undertaken?

Question #

Airbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned with the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.05/ and six-month forward exchange rate is $1.10/ at the moment. Airbus can buy a six-month put option on U.S. dollars with a strike price of 0.95/$ for a premium of 0.02 per U.S. dollar. Currently, six-month interest rate is 2.5% in the euro zone and 3.0% in the U.S.

Compute the guaranteed euro proceeds from the American sale if Airbus decides to hedge using a forward contract.

If Airbus decides to hedge using money market instruments, what action does Airbus need to take? What would be the guaranteed euro proceeds from the American sale in this case?

If Airbus decides to hedge using put options on U.S. dollars, what would be the expected euro proceeds from the American sale? Assume that Airbus regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

At what future spot exchange rate do you think Airbus will be indifferent between the option and money market hedge?