Question
Project Information for firm ABC: * Will export product to Mexico and is looking for firm to swap pesos with over life of project *
Project Information for firm ABC:
* Will export product to Mexico and is looking for firm to swap pesos with over life of project
* Time period of project is 4 years
* After tax cash flow expected to be 1,000,000 pesos
* Peso’s spot rate is $0.20
* Risk free annual interest rates: U.S. 6 percent, Mexico 11 percent
* Interest rate parity exists
* Use one year forward rate as predictor of exchange rate in one year
* Exchange rates will change by percentage predicted for year one in years 2 through 4
* Firm XYZ will take the 1,000,000 pesos each year at an exchange rate of $0.17 per peso
* Ignore taxes
ABCs details:
Capital Structure: | 60 percent debt and forty percent equity |
Corp. Tax rate: | 30 percent |
Debt financing cost: | 10 percent |
US expected stock returns: | 18 percent |
Beta: | 0.9 |
ABC will use its cost of capital as required return on project
Determine the NPV if ABC enters into a swap agreement with XYZ and does not hedge its position.
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