Copied! Short-Term Asset and Liability Management T2m as k IIII II Ein - - Kent Co. is a large U.S. firm with no international business. It has two branches within the United States, an eastern branch and a western branch. Each branch currently makes investing or financing decisions independently, as if it were a separate entity. The eastern branch has excess cash of $15 million to invest for the next year. It can invest its funds in Treasury bills denominated in dollars or in any of four foreign currencies. The only restriction enforced by the parent is that a maximum of $5 million can be invested or financed in any foreign currency. The western branch needs to borrow $15 million over one year to support its U.S. operations. It can borrow funds in any of these same currencies (although any foreign funds borrowed would need to be converted to dollars to finance the U.S. operations). The only restriction enforced by the parent is that a maximum equivalent of $5 million can be borrowed in any single currency. A large bank serving the international money market has offered Kent Co. the following terms: Kent Co. has created one-year forecasts of each currency for the branches to use in making their investing or financing decisions: Jage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202 631 Questions 1. Determine the investment portfolio composition for Kent's eastern branch that would maximize the expected effective yield while satisfying the restriction imposed by the parent. 2. What is the expected effective yield of the investment portfolio? 3. Based on the expected effective yield for the portfolio and the initial investment amount of \$15 million, determine the annual interest to be earned on the portfolio. 4. Determine the financing portfolio composition for Kent's western branch that would minimize the expected effective financing rate while satisfying the restriction imposed by the parent. 5. What is the expected effective financing rate of the total amount borrowed? 6. Based on the expected effective financing rate for the portfolio and the total amount of $15 million borrowed, determine the expected loan repayment amount beyond the principal borrowed. 7. When the expected interest received by the eastern branch and paid by the western branch of Kent Co. are consolidated, what is the net amount of interest received? If the eastern branch and the western branch worked together, the eastern branch could loan its $15 million to the western branch. Nevertheless, one could argue that the branches could not take advantage of interest rate differentials or expected exchange rate effects among currencies. Given the data provided in this example, would you recommend that the two branches make their short-term investment and financing decisions independently, or should the eastern branch lend its excess cash to the western branch? Explain