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Question 24 The Brazilian meat company SoCarnes wishes to start production in France. This new production is associated to a project with the following forecasted
Question 24 The Brazilian meat company SoCarnes wishes to start production in France. This new production is associated to a project with the following forecasted cash flows in euros (see table 1 below). The cost of capital in France is 10%, and the spot exchange rate is 6.2 BR$ / 1 (1 euro buys 6.2 Brazilian reals). The risk-free rate for Brazil is 7% and the risk-free rate for France is 3% Table 1 Year 02 1 2 32 4 5- CF (in euros) -1000- 2904 3204 3704 4004 400- a) What is the project value in Brazilian reals? You should assume that SoCarnes sells forward the future euro cash flows and convert them to Brazilian reals each period. [8 marks] b) Provide another simpler method to compute the project value in Brazilian reals with the same answer as in question 2a). [4 marks] c) Discuss qualitatively what is the proper cost of capital to be considered by the Brazilian investors in France in the example above. Be precise on the assumptions you make on the Brazilian investors and the French project. [6 marks] d) What would happen if SoCarnes could not perfectly hedge its foreign exchange exposure, because of a lack of a functioning forward exchange market ? Give suggestions on how SoCarnes could mitigate the exchange rate risk. [7 marks]
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