Fischer Inc. is a multinational U.S firm that exports motor bikes from Florida to Europe It obtains supplies and borrows funds locally for this segment. It also produces hospital equipment with most of its revenues from this segment coming from the United States and about half of its expenses require outflows in Philippine pesos (to pay for Philippine materials). Most of the firms competition is from U.S. firms that have no international business at all. The company has total assets of$100 million and debt of$20 million. The firm's before- tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. Fisher Inc. uses the international financial markets to take advantage of favorable eco- nomic conditions and to reap the benefits of international diversification. The nominal rate of interest is 2 percent higher in Canada. Assume that the spot exchange rate of the British pound is $1.73.

1 How would the appreciation of the euro likely affect its net cash flows? Why?

2. What does the difference in the nominal rates imply about expectations of U.S. inflation and Canadian inflation?

3 Based on your answer to question 2. what de these inflationary expectations suggest about future exchange rates?

4. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?

5. What is this firm's cost of capital?