Question
Project information for your firm ABC - will export product to mexico and is looking for a firm to swap pesos with over the life
Project information for your firm ABC
- will export product to mexico and is looking for a firm to swap pesos with over the life of the project
- time period for the project is 4 years
- after tax cash flow is expected to be 1,000,000 pesos
- Peso spot rate is $0.20
- Risk free annual interest rates: US 6 percent, Mexico 11 Percent
- Inbterest rate parity exists
- use one year one year forward rate as predictor of exchange rate in one year
- exchange rates will change by the same percentage predicted for year one in years 2-4
- 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. Please show detailed calculations.
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