finance for decision making

Explain the impact of currency fluctuations on a multinational corporation. Explain how a company can use forward market hedging to protect itself against wide currency fluctuations. An Australian airline company has just entered into a contract to purchase a new fleet of airplanes for US$2 billion and the current exchange rate is A$/US$0.91(i.e. 1A$ = 0.91US$). The company has to pay for the fleet in six months' time. The airline company considers hedging its exposure to foreign exchange risk by using an option; currently an option on US$ that expires in 6 months has an exercise price of A$/US$0.89 and a premium of A$0.01. What type of option should the company use? Why? If the actual exchange rate in six months' time is A$/US$0.85/ explain how the hedge has protected the company from its exposure to exchange rate fluctuation. If the actual exchange rate in six months' time is A$/US$0.93, explain how the hedge has protected the company from its exposure to exchange rate fluctuation. Wombat Ltd is considering the acquisition of Koala Ltd at a cash price of $200,000. Wombat would immediately sell some of Koala's assets for $20,000 if it makes the acquisition. Koala has a cash balance of $2,000 at the time of the acquisition. Wombat believes it can generate after-tax inflows of $3\000 per year for the next seven years from the Koala acquisition. Wombat has a cost of capital of 10 per cent. Would you recommend Wombat make the cash acquisition? Explain your answer. ABC Limited is considering two projects. Each requires an immediate cash outlay: $10,000 for project A and $9,000 for project B. Project A has a life of four years, and project B has a life of five years; neither will have any salvage value at the end of its life. For tax purposes, each would be depreciated by the prime cost method (i.e. depreciate by a percentage of the prime cost each year), project A at 25% and project B at 20%. The company's tax rate is 30%, and its required rate of return after tax is 11%. Net cash flows before taxes have been projected as follows: Calculate the net cash flows after tax for each project. Calculate the payback period for each project. Calculate the net present value for each project. If the two projects are mutually exclusive, should ABC Limited adopt project A, or project B? Why