Forever Green issued a bond with 10-year maturity. It had a $1,000 par value and paid 10% annual interest compounded semiannually. Your required rate of return on the bond is 8%. How much are you willing to pay for this bond?

 

b) Your company currently has a net cash flow of $2,500,000. You expect the net cash flows to grow at a constant rate of 2% if you make no new investments.  However, you have just been offered an opportunity to invest in a medical equipment business that is projected to generate $4,200,000 of NPV. You require a rate of 12% for your investments and there are currently 1,200,000 shares outstanding in your company. What is the price per share if you don't undertake the medical equipment business? What is the price per share if you undertake the medical equipment business? 

 

a) Assume that capital markets are competitive and that the international Fisher hypothesis holds. The one-year interest rate is approximately 2% in the USA and 7% in Indonesia. If the expected inflation rate is 8% in the USA, what is the expected inflation rate in Indonesia? 

 

b) A firm wants to use an option to hedge 2,000,000 Euros in receivables. The premium paid is US$0.02/Euro and the exercise price is US1.1/Euro. If the option is exercised, what is the total dollar amount received after accounting for the premium paid? (Ignore all other transaction costs and the time value of the money for the premium paid.) 

 

Your company is contemplating on investing in a manufacturing facility in China. You are charged with doing the financial analysis for this project. You expect the cash flows (in Chinese RMB) for this project to last indefinitely. You estimated the following cash flows for 2022-2027 and that the cash flows will grow at a constant rate starting 2028. (12 points) 

 

Year	FCF	Other Data
2022	-70,000,000 RMB	Growth rate of RMB FCF starting 2028 = 2%
2023	6,000,000 RMB	Cost of Capital for similar U.S. Projects (WACC) = 10%
2024	9,000,000 RMB	Inflation in the U.S. = 7%
2025 2026 2027	10,000,000 RMB 12,000,000 RMB 15,000,000 RMB	Inflation in China = 8% Spot rate =  7.3 RMB/USD

 

a) What is the appropriate discount rate you should use to discount the RMB cash flows?

b) What is the RMB NPV and IRR for this project? (If Excel is used, please cut and paste it here, showing all the cash flows and answers to this question.)

c) What is the USD NPV for this project? (Please show your calculation converting RMB NPV to USD NPV.)

d) What are the i) RMB cost of capital, and ii) RMB NPV if inflation in China rises to 9% and the U.S. inflation rises to 8%?

 

6. Cartel Corporation is acquiring the Superior Corporation. Neither firm has any debt outstanding. Cartel has 150 million shares of stock outstanding with a market price of $30 per share. Superior has 100 million shares of stock outstanding with a market price of $14 per share.  Cartel's advisors estimate the value of synergy today to be $140 million.

 

a) What is the estimated market value of the combined companies? 

b) Suppose Cartel pays $1.5 billion in cash to buy 100 percent of the common stock of Superior.  What is the NPV of the merger?  

c) If Cartel offers 25% of the combined firm's stock to Superior's shareholders, what is the NPV of the merger?