Question:

kindly assist by answering the following questions below. PLEASE SHOW ALL WORKINGS

Question 1 [20 Marks]

A U.S. multinational company is considering whether to borrow British Pounds for one year. It finds that the quoted interest rate for the British Pounds is 10 percent and the quoted rate for the U.S. dollar is 16 percent. It then develops a probability distribution for the British Pound's possible percentage change in value over the life of the loan as follows:

Possible rate of change in the British Pound over the life of the loan Probability of occurrence

-5% 10%

-2% 15%

-1% 5%

+1 20%

+3% 15%

+5% 10%

+7% 15%

+10% 10%

(a) Calculate the effective financing rate for every possible rate of change in the BritishPound if it does occur.[10]

(b) Determine the expected financing rate of the British Pounds [5]

(c) Should the U.S. multinational company borrow U.S. dollars or British Pounds?Substantiate your answer. [5]

Question 2 [17 Marks]

ABC LTD, a U.K. multinational enterprise is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR 50 million. The annual cash flows over the five year economic life of the project are estimated to be ZAR 13 million, ZAR 18 million, ZAR 25 million, ZAR10 million, and ZAR9 million. The parent firm's cost of capital in pounds is 7.5 percent. Long-run inflation is forecasted to be 4 percent per annum in the U.K. and 12 percent in South Africa. The current spot foreign exchange rate is ZAR/ = 15.56. Determine the NPV for the project in by:

(a) Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher Effect and then converting to at the current spot rate. [5]

(b) Converting all cash flows from ZAR to at Purchasing Power Parity forecasted exchange rates and then calculating the NPV at the pound cost of capital. [7]

(c) What is the NPV in pounds if the actual pattern of ZAR/ exchange rates is:S(0) = 15.56, S(1) = 14.56, S(2) = 16.72, S(3) = 15.78, S(4) = 16.54, and S(5) = 16.32?Justify the difference in the actual and the forecasted NPV [5]

Question 3 [13 Marks]

ABC Ltd would like to assess the country risk of South Africa. ABC Ltd has identified various political and financial risk factors, as shown below.

Political Risk Factor Assigned Rating Assigned Weight Blockage

of fund transfers 6 55%

Bureaucracy 2 45%

Financial Risk Factor Assigned Rating AssignedWeight

Interest rate 4 20%

Inflation 5 15%

Exchange rate 4 10%

Competition 3 30%

Growth 7 25%

ABC Ltd has assigned an overall rating of 75 percent to political risk factors and of 25 percent to financial risk factors. The investment policy for ABC Ltd mentions that the company can only invest in a country if the country risk is below 4.5. Should ABC Ltd consider South Africa for investment ? (13)