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Question 7 (1 point) Dynasty Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $5 million. It

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Question 7 (1 point) Dynasty Co. is considering the acquisition of a unit from the French government. Its initial outlay would be $5 million. It will reinvest all the earnings in the unit. It expects that at the end of 8 years, it will sell the unit for 13,100,000 euros after capital gains taxes are paid. The spot rate of the euro is $1.20 and is used as the forecast of the euro in the future years. The annualized U.S. risk-free interest rate is 0.06 regardless of the maturity of the debt, and the annualized risk-free interest rate on euros is 0.05, regardless of the maturity of debt. Assume that interest rate parity exists. Dynasty's cost of capital is 20%. Dynasty could partially finance the acquisition. It could obtain a loan of 3 million euros today that would be used to cover a portion of the acquisition. In this case, it would have to pay back a lump sum total of 7 million euros at the end of 8 years to repay the loan. There are no interest payments on this debt. The way in which this financing deal is structured, none of the payment is tax-deductible. Determine the NPV if Cantoon uses the forward rate instead of the spot rate to forecast the future spot rate of the euro, and elects to partially finance the acquisition. (You need to derive the 8-year forward rate for this specific question.)

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