Korp United is an Australian company with 500,000 shares outstanding. The share price is $20. Korp United is considering paying a cash dividend of $1 per share. Alternatively, the company can distribute the same amount to the shareholders through share repurchase. Another concern of the management is exchange rate risk. The company's income is mainly derived from export of its product to Japan. The management is concerned about the effect of currency fluctuations on cash flows as the Australian dollar is expected to drastically appreciate against the Japanese Yen at the end of the year. The spot exchange rate is A$0.015/ (0.015 Japanese Yen equals 1 Australian Dollar). A one-year forward contract can be arranged at a forward rate of A$0.014/. In addition, a call option with a strike price of A$0.015/ and a put option with a strike price of A$0.014/ is available. Required: (a) (b) (c) Assuming a perfect capital market, would an investor prefer stock repurchase or cash dividend? (6 marks) Discuss whether investors would prefer share repurchase or cash dividends after taking into account the effect of tax. Assume the cash dividends will be paid out of profits which have been taxed at the full Australian corporate tax rate of 30%. (6 marks) How can Korp United reduce the risk associated with currency fluctuations using options or forward contracts? (7 marks) Suppose the Australian dollar did not appreciate against yen as expected. Instead the rate is A$0.018/ in October. In hindsight, should the company have hedged using options or forward contracts? (10 marks) Discuss one method the company can use to reduce exchange rate risk without the use of options, forwards or other derivatives. (3 marks) (e) Korp United is an Australian company with 500,000 shares outstanding. The share price is $20. Korp United is considering paying a cash dividend of $1 per share. Alternatively, the company can distribute the same amount to the shareholders through share repurchase. Another concern of the management is exchange rate risk. The company's income is mainly derived from export of its product to Japan. The management is concerned about the effect of currency fluctuations on cash flows as the Australian dollar is expected to drastically appreciate against the Japanese Yen at the end of the year. The spot exchange rate is A$0.015/ (0.015 Japanese Yen equals 1 Australian Dollar). A one-year forward contract can be arranged at a forward rate of A$0.014/. In addition, a call option with a strike price of A$0.015/ and a put option with a strike price of A$0.014/ is available. Required: (a) (b) (c) Assuming a perfect capital market, would an investor prefer stock repurchase or cash dividend? (6 marks) Discuss whether investors would prefer share repurchase or cash dividends after taking into account the effect of tax. Assume the cash dividends will be paid out of profits which have been taxed at the full Australian corporate tax rate of 30%. (6 marks) How can Korp United reduce the risk associated with currency fluctuations using options or forward contracts? (7 marks) Suppose the Australian dollar did not appreciate against yen as expected. Instead the rate is A$0.018/ in October. In hindsight, should the company have hedged using options or forward contracts? (10 marks) Discuss one method the company can use to reduce exchange rate risk without the use of options, forwards or other derivatives. (3 marks) (e)