Corporate Finance

1.Wilmington Inc. is considering the acquisition of a unit from the French government.

Initial outlay will be $4 million dollars

All earnings reinvested

Time period 8 years and at that time will sell acquisition for 12 million euros after taxes

Spot rate for euro is $1.20

Risk free U.S. intersect rate regardless of maturity is 5 percent

Risk free interest rate on euros regardless of maturity is 7 percent

Interest rate parity holds

Cost of capital is 20 percent

Cash will be used for acquisition

a.Using the parameters above, Determine the NPV.

b.Rather than use all cash, Wilmington Inc. could partially finance the acquisition. It could obtain a loan of 3 million euros today that would be used to cover a portion of the acquisition. In this case, it would have to pay back a lump sum total of 7 million euros at the end of 8 years to repay the loan. There are no interest payments on this debt. This financing deal is structured such that none of the payment is tax-deductible.

Determine the NPV if Wilmington uses the forward rate instead of the spot rate to forecast the future spot rate of the euro, and elects to partially finance the acquisition.

Question 2.

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.