Korp United is an Australian company with 500,000 shares outstanding. Theshareprice is $20. KorpUnited is considering paying a cash dividend of SI per share. Alternatively, the company can distribute thesame amount to theshareholders through share repurchase.

Another concernof the management is exchangerats risk. The company's income is mainly derived from export of its product to Japan. The management is concernedabout theeffect of currency fluctuations on cash flows as the Australian dollar is expected to drastically appreciate against As Japanese Yen at the end of the year.

Thespot exchange rateis AS0.015/4 (0.015 Japanese Yen equals I Australian Dollar). A one-year forward contract can bearranged at a forward rate of AS0.014/4. In addition, a call option with a strike price of AS0.015fli and a put option with a strike price of A$0.014/4 is available.

Required:

(a)Assuming a perfect capital market, would an investor prefer stock repurchase or cash dividend? (6 marks)

(b)Discuss whether investors would prefer share repurchaseor cash dividends after taking into account the effect of tax. Assume thecash dividends will bepaid out a profits which have been taxed at the full Australian corporate tax rate of 30%. (6 marks)

(c)How can Korp United reduce therisk associated with currency fluctuations using options or forward contracts? (7 marks)

(d) Suppose As Australian dollar did not appreciate against yen as expected. Instead therate is AS0.018/4 in October. In hindsight, should thecompany have hedged using options or forward contracts? (10 marks)

(e)Discuss one method thecompany can use to reduce exchange raterisk without the use of options, forwards or other derivatives. (3 marks)