F FIN 4604: Sample Questions III

1). Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is: a) 8% b) 14.48% c) 2% d) 1.52% e) 14% 2). Assume that the U.S. interest rate is 11% while the interest rate on euros is 7%. If euros are borrowed by a U.S. firm, they would have to ________ against the dollar by _______ in order to have the same effective financing rate from borrowing dollars. a) Depreciate; 3.74% b) Appreciate; 3.74% c) Appreciate; 4.53% d) Depreciate; 4.53% 3). When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the _______ if the currency ________. a) Foreign currencys interest rate; appreciates b) Foreign currencys interest rate; depreciates c) Domestic interest rate; depreciates d) Domestic interest rate; appreciates 4). If a firm repeatedly borrows a portfolio of foreign currencies, the variability of the portfolios effective financing rate will be highest if the correlations between currencies in the portfolio are _______ and the individual variability of each currency is _________. a) High; low b) High; high c) Low; low d) Low; high 5). Assume the annual British interest rate is above the annual U.S. interest rate (iuk > ius). Also assume the pounds forward rate of $1.75 equals the pounds current spot rate. Given this information, interest rate parity ________ exist, and the U.S. firm _________ lock in a higher return by investing in pounds for one year. a) Does; could b) Does; could not c) Does not; could not d) Does not; could 6). A risk-averse firm would prefer to borrow _______ when the expected financing costs are similar in a foreign country as in the local country. a) Locally b) In the foreign country c) Either a or b d) Part of the funds locally, and part from the foreign country

7). The effective financing rate is obtained by adjusting nominal financing rate for: a) Inflation over the period of concern. b) Spot exchange rate changes over the period of concern. c) A change in foreign interest rates over the period of concern. d) The forward Premium (discount) over the relevant period. 8). If interest rate parity holds and transaction costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is: a) Less than the domestic interest rate. b) Greater than the domestic interest rate. c) Equal to the domestic interest rate. d) Greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount. 9). If interest rate parity holds, transactions costs are zero, and forward rate is an accurate predictor of the future spot rate, then the effective financing rate on a foreign currency would be: a) Equal to the U.S. interest rate. b) Less than the U.S. interest rate. c) More than the U.S. interest rate. d) Less than the U.S. interest rate if the forward rate exhibited a discount and more than the U.S. interest rate of the forward rate exhibited a premium. 10). Assume the U.S. one-year rate is 8%, and the British one-year interest rate is 6%. The one-year forward rate of the pound is $1.97. The spot rate of the pound at the beginning of the year is $1.95. By the end of the year, the pounds spot rate is $2.05. Based on the information, what is the effective financing rate for a U.S. firm that takes out a oneyear, uncovered British loan? a) 12.4% b) 7.1% c) 13.5% d) 10.3% e) 11.4% 11). Euro-notes are underwritten by: a) European Central Bank. b) Commercial banks. c) The International Monetary Fund. d) The Federal Reserve System. e) The World Bank 12). Assume U.S. interest rate is 7.5%, New Zealand rate is 6.5%, the spot rate of the NZ$ is $.52, and the one-year forward rate of NZ$ is $.50. At the end of the year, the spot rate of NZ$ is $.48. Compute effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan? a) 1.7%. b) 0.0%. c) 14.7%. d) 15.4%. e) 8.3%.

13). A negative effective financing rate for a U.S. firm implies that the firm: a) Will incur a loss on the project financed with the funds. b) Paid more interest on the funds than what it would have paid if it had borrowed dollars. c) Will be unable to repay the loan. d) None of the above. e) Paid back an amount less than originally borrowed 14). A U.S. firm plans to borrow Swiss francs today for a one-year period. The Swiss interest rate is 9%. It uses todays spot rate as a forecast for the francs spot rate in one year. The U.S. one-year interest rate is 10%. The expected effective financing rate on Swiss francs is: a) Equal to the U.S. interest rate b) Less than the U.S. interest rate, but more than the Swiss interest rate c) Equal to the Swiss interest rate d) Less than the Swiss interest rate e) More than the U.S. interest rate 15). Assume Jelly Corporation, a U.S.-based MNC, obtains a one-year loan of 1,500,000 Malaysian Ringgit (MYR) at a nominal interest rate of 7%. At the time the loan is extended, the spot rate of the ringgit is $.25. If the spot rate of the ringgit in one year is $.28, the dollar amount initially obtained from the loan is $________, and $_________ are needed to repay the loan. a) 375,000; 449,400 b) 449,400; 375,000 c) 6,000,000; 5,375,143 d) 5,357,142; 6,000,000 16). Morton Company obtains a one-year loan of 2,000,000 Sudanese Dinar (SD) at an interest rate of 6%. At the time the loan is extended, the spot rate of the dinar is $.005. If the spot rate of the dinar at maturity of the loan is $.0035, what is the effective financing rate for borrowing dinar? a) 37.8% b) 51.43% c) 25.8% d) 6% e) None of the above 17). ____________ are free of default risk. a) Euro notes b) Euro bonds c) Eurocommercial paper d) Eurocurrencies e) None of the above

** The following information refers to questions 18 and 19. Assume a U.S.-based MNC is borrowing Romanian leu (ROL) at an interest rate of 8% for one year. Also assume that the spot rate of the leu is $.00012 and the one-year forward rate of the leu is $.00010. The expected spot rate of the leu one-year from now is $.00011. 18) What is the effective financing rate for the MNC assuming it borrows leu on a covered basis? a) 10% b) 10% c) 1% d) 1% e) None of the above 19) What is the effective financing rate for the MNC assuming it borrows leu on an uncovered basis? a) 10% b) 10% c) 1% d) 1% e) None of the above 20) Assume that interest rate parity holds between the U.S. and Cyprus. The U.S. one-year interest rate is 7% and the Cyprus one-year interest rate is 6%. What is the effective financing rate of a one-year loan denominated in Cyprus pounds assuming that a US MNC covers its exposure by purchasing pounds one year forward? a) 6% b) 7% c) 1% d) More information required to answer ** The following information refers to questions 21 and 22 Cameron Corporation would like to simultaneously borrow Japanese yen () and Sudanese dinar (SDD) for a 6-month period. Cameron would like to determine the expected financing rate and the standard deviation of financing rate for a portfolio consisting of 30% yen and 70% dinar. Cameron has gathered the following information: Mean effective financing rate of Japanese yen or 6 months = 4% Mean effective financing rate o Sudanese dinar for 6 months = 1% Standard deviation for Japanese yens effective financing rate = .10 Standard deviation for Sudanese dinars effective financing rate = .20 Correlation coefficient of effective financing rates of these 2 currencies = .23 21) What is the expected financing rate for the portfolio contemplated by Cameron Corporation? a) 3.10% b) 1.90% c) 17.00% d) 13.00% e) None of the above

22) What is the expected standard deviation of financing rate for the portfolio contemplated by Cameron? a) .0224 b) .1498 c) .0289 d) .1700 e) None of the above 23) A firm will likely benefit most from international diversification if: a) The correlations between country economies are high b) The correlations between country economies are low c) Variability of economies are high d) Economies are integrated e) Economies are segmented f) Both b and e 24) Which of the following is a motivation for a firm to engage in international business? a) Exploit economies of scale b) Exploit monopolistic advantages c) Diversification d) Internalization e) All of the above 25) When evaluating international project cash flows, which of the following factors is relevant? a) Future inflation b) Blocked funds c) Remittance provisions d) Exchange rate dynamics e) All of the above 26) In multinational capital budgeting analysis, the following methods are used for adjusting risk assessment except: a) Risk adjusted discount rate b) Sensitivity analysis c) Simulation d) Exchange rate forecasting 27) Which of the following is not a characteristic of a country to be considered within a MNCs international tax assessment? a) Corporate income taxes b) Withholding taxes c) Provisions for carry-backs and carry-forwards d) Tax treaties e) All of the above are characteristics to be considered 28) An argument for MNCs to have a greater debt-intensive capital structure is: a) They are well diversified b) Foreign government tax rules may change over time c) Exposure to exchange rate fluctuations d) Exposure to fund blockage 5

29) Which of the following factors is not expected to generally have a favorable impact on the firms cost of capital? a) Easy access to international capital markets b) High degree of international diversification c) Volatile exchange rate changes d) All of the above 30) The capital asset pricing theory is based on the premise that: a) Only unsystematic variability in cash flows is relevant b) Only systematic variability in cash flows is relevant c) Both systematic and unsystematic variability in cash flows are relevant d) Neither systematic nor unsystematic variability is cash flows is relevant 31) Based on the factors that influence a countrys cost of capital, the cost of capital in less developed countries is likely to be ________ than that of the U.S. and _______ than that of Japan. a) Higher; higher b) Higher; lower c) Lower; lower d) Lower; higher 32) The term local target capital structure is frequently used to represent: a) The average capital structure of local firms where the MNCs subsidiary is based b) The average capital structure of local firms where the MNCs parent is based c) The desired capital structure of a subsidiary of a particular MNC d) The desired capital structure of a particular MNC as an entity. 33) The term global capitals structure is used to represent: a) The average capital structure of all MNCs across countries b) The average capital structure of all domestic firms across countries c) The capital structure of a subsidiary of a particular MNC d) The capital structure of a particular MNC (including all subsidiaries) 34) The __________ an MNC, the _________ its cost of capital is likely to be. a) Larger; higher b) Larger; lower c) Smaller; lower d) Both a and c 35) MNC Corporation has a beta of 2.0. The risk-free rate of interest is 5%, and the return on an average stock is 13%. What is the required rate of return on MNC stock? a) 21% b) 41% c) 16% d) 13% e) None of the above 36) Which of the following is not a reason that the cost of debt can vary across countries? a) Differences in the risk-free rate b) A high price/earnings multiple c) Differences in the risk premium d) Differences in demographics 6

37) In general, MNCs would probably prefer to use __________ foreign debt when their foreign subsidiaries are subject to __________ local interest rates. a) More; low b) More; high c) Less; low d) Both b and c e) None of the above 38) In general, MNCs would probably prefer to use __________ foreign debt when their foreign subsidiaries are subject to potentially __________ local currencies. a) More; strong b) More; weak c) Less; strong d) Less; weak e) Both b and c 39) A macro-assessment of country risk: a) Focuses on the particular business of the firm involved b) Excludes all aspects relevant to a particular firm or project c) Both a and b d) None of the above 40) A micro-assessment of country risk: a) Focuses on the particular business of the firm involved b) Excludes all aspects relevant to a particular firm or project c) Both a and b d) None of the above 41) The Delphi technique: a) Is a method of processing information about the country being evaluated b) Requires the use of discriminant analysis to assess country risk c) Involves the collection of independent expert opinions on country risk d) None of the above 42) The most important variable in determining a countrys degree of overall country risk: a) Is political risk b) Is financial risk c) Is the probability of a host government takeover d) May often vary with the country in question 43) The primary purpose of country risk analysis when applied to capital budgeting is usually to measure the effect of country risk on: a) Sales b) Cash flows c) Consolidated balance sheet d) Consolidated income statement 44) A firm may incorporate a country risk rating into the capital budgeting analysis by: a) Adjusting the NPV upward if the country risk rating has fallen below a benchmark level b) Adjusting the discount rate upward as the country risk rating decreases (implying increased risk) c) Both a and b d) None of the above 7

45) Country risk analysis is important because it can be used by a MNC: a) As a screening device to avoid countries with prohibitive/excessive risk b) To monitor countries where the MNC is presently engaged in international business c) To improve the analysis used to make long-term investing or financing decisions d) To revise investment of financing decisions in the face of new risk profile. e) All of the above 46) ______________ is (are) not a form of political risk. a) Exchange rate movements b) Attitude of consumers in the host country c) Attitude of the host government d) Blockage of funds transfers e) All of the above are forms of political risk 47) You have an opportunity to invest in Australia at an interest rate of 8%. Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this investment is: a) 8.00% b) 6.00% c) 10.16% d) 5.88% e) None of the above 48) Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNCs funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 7% for Taiwan dollars and 5% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is 0.7. Based on this information, the standard deviation of this two-currency portfolio is: a) 5.13% b) 2.63% c) 4.33% d) 5.55% e) None of the above 49) Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30% of the MNCs funds are lev and 70% are leu. The standard deviation of exchange movements is 10% for lev and 15% for leu. The correlation coefficient between movements in the value of the lev and the leu is .85. Based on this information, the standard deviation of this two-currency portfolio is : a) 17.28% b) 13.15% c) 14.50% d) 12.04% e) None of the above 50) A Japanese Tokyo-based MNC has a German subsidiary that annually remits 50 million to Japan. If the Euro _______ against the yen, the value of remitted funds _______ a) Appreciates; decreases b) Depreciates; is unaffected c) Appreciates; is unaffected d) Depreciates; decreases 51. Which of the following U.S. industries would most likely take advantage of lower costs in some 8

developing foreign countries? a. b. c. d. Assembly line production. Specialized professional services. Nuclear missile planning. Planning for more sophisticated computer technology.

52. The term privatization is typically used to describe: a. b. c. d. Firms that are purchased by their managers. Firms that are purchased by the government. Firms that are bought out by other firms. Government enterprises that are purchased by corporations and other investors.

53. In general, products and services are generally becoming ________ standardized across countries, which tends to _________ the globalization of business. a. b. c. d. More; encourage More; discourage Less; discourage Less; encourage

54. ________ are most commonly classified as a Foreign Direct Investment (FDI). a. b. c. d. e. Foreign acquisitions Purchases of international stocks Licensing agreements Exporting or importing transactions Strategic alliances

55. Which of the following is not an additional risk resulting from international business? a. b. c. d. Exchange rate fluctuations. Political risk Interest rate risk. Exposure to foreign economies.

56. The __________ a projects variability in cash flows, and the ___________ the correlation between the projects cash flow and MNCs cash flow, the lower the risk of the project to the MNC. a. b. c. d. Higher; higher Higher; lower Lower; lower Lower; higher

57. Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ______ and the number of foreign countries it sold products to was _____. 9

a. b. c. d.

Higher; large Higher; small Lower; small Lower; large

58. When economic conditions of two countries are _______, then a firm would _______ its risk by operating in both counties instead of concentrating just in one. a. b. c. d. Highly correlated; reduce Not highly correlated; not reduce Not highly correlated; reduce None of the above

59. In capital budgeting analysis, the use of a cumulative NPV is useful for: a. Determining a probability distribution of NPVs. b. Determining the time required to achieve a positive NPV. c. Determining how the required rate of return changes over time. d. Determining how the cost of capital changes over time e. A and B 60. Other things being equal, firms from a particular home country will engage in more international acquisitions if they expect foreign currencies to ________ against their home currency, and if their cost of capital is relatively ________. a. b. c. d. Appreciate; low Appreciate; high Depreciate; high Depreciate; low

61. The impact of blocked funds on the net present value of a foreign project will be greater if interest rates are ___________ in the host country and there are _________ investment opportunities in the host country. a. b. c. d. Very high; limited Very low; limited Very low; numerous Very high; numerous

62. An international projects APV is ________ related to the size of the initial investment and _________ related to the projects required rate of return. a. b. c. d. Positively; positively Positively; negatively Negatively; positively Negatively; negatively

63. An international projects APV is __________ related to consumer demand and__________ related to the projects salvage value. a. Positively; positively b. Positively; negatively 10

c. Negatively; positively d. Negatively; negatively 64. As the financing of a foreign project by the parent _______ relative to the financing provided by the subsidiary, the parents exchange rate exposure _______ a. b. c. d. Increases; decreases Decreases; increases Increases; increases None of the above

65. One year ago John Doe invested in the stock of Lloyds, a U.K company. During the year, the stock declined by 20% but the British pound appreciated by 10%. If John Doe sold the stock today his return would be ______. a. b. c. d. e. 30% -10% -12% 32% None of the above.

66. When determining whether a particular proposed project in a foreign country is feasible: a. A country risk rating can adequately substitute for a capital budgeting analysis. b. Country risk analysis should be incorporated within the capital budgeting analysis. c. The effect of country risk on sales revenue is more important than the effect on cash flows. d. The project with the highest country risk rating (lowest country risk) should be accepted. e. B and D 67. The best course of action most likely to reduce political risk is for a MNC to: a. Avoid political risk all together. b. Make the cost of expropriation or confiscation prohibitive to the host country. c. Raise the benefit to the host country of the MNCs operations in the country. d. Buy political risk insurance. 68. The following strategies may be employed to reduce exposure to country risk by MNCs except: a. Short-term profit maximization. b. Protecting unique supplies/technology. c. Hiring local employees. d. Borrowing funds locally. e. Joining local political parties. f. Purchasing insurance.

69. __________ typically have maturities of less than one year. a. Eurobonds b. Euro-commercial paper c. Euronotes 11

d. ADRs. e. Both b and c 70. MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if an American-based MNC has _________ in Algerian dinars, it could borrow ____________, resulting in an offsetting effect. a. Payables; dinars b. Receivables; dinars c. Payables; dollars d. Receivables; dollars. 71. A parents perspective is appropriate in attempting to determine whether a project will enhance _____________. a. Subsidiary earnings b. Subsidiary value c. MNC earnings d. MNC value e. None of the above 72. Which of the following is not an input required for a multinational capital budgeting analysis, given that it is conducted from the parents viewpoint? a. Fund-transfer restrictions b. Project lifetime c. Tax laws d. Subsidiarys management philosophy e. Exchange rates 73. Which of the following is not a form of financial risk? a. Exchange rate movements b. Inflation rates c. Blockage of fund transfers d. All of the above are forms of financial risk. 74. _________ typically have maturities of one to six months; _________ typically have maturities of one to six months but can be tailored to the issuers preferences. a. Eurobonds; Euronotes b. Euro-commercial paper; Euronotes c. Euronotes; euro-commercial paper d. Euro-commercial paper; Eurobonds

75. A _________ effective financing rate implies that as U.S. firm borrowing the foreign currency paid _________ in total loan repayment than the amount borrowed. a. Negative; fewer b. Positive; more 12

c. Negative; more d. Positive; fewer e. Both a and b 76. The following are cost-related motives for Foreign Direct Investment except: a. Exploiting monopolistic advantages b. Fully benefiting from economies of scale c. Using foreign factors of production d. Using foreign raw materials 77. _______ is not a revenue-related motive for Foreign Direct Investment a. Attracting new sources of demand b. Fully benefiting from economies of scale c. Exploiting monopolistic advantages d. Strategy of following the customer 78. The primary provider of political risk insurance to U.S. MNCs is the: a. Lloyds of London b. Liberty insurance Company c. American International Group d. Overseas Private Investment corporation e. Agency for international Development 79. Expropriation is most likely in the ______ sector of an economy. a. Construction b. Agriculture c. Extractive d. Manufacturing e. Services f. All are equally likely 80. Assume that the euro is expected to appreciate by 4% annually against the U.S. dollar. If a U.S. company can borrow dollars for 9.3%, and is trying to minimize its expected financing cost, what is the highest interest rate it should be willing to pay to borrow euros? a. 8.9% b. 7.2% c. 4.3% d. 5.1% e. None of the above

81. Assume that the euro is expected to depreciate 4% annually against the U.S. dollar. If a U.S. company can borrow dollars for 9.3%, and is trying to minimize its expected financing cost, what is the highest interest rate it should be willing to pay to borrow euros? a. 5.09% b. 13.3% c. 13.85% 13

d. 5.3% e. None of the above 82. A US investor purchased Canadian stocks at the beginning of the year in which the Canadian stock increased in valued by 18%. Assume that the exchange rate C$/US was 1.1255 at the beginning of the year and 1.2575 at the end of the year. What was the investors effective return? a. 5.61% b. 31.84%
c. 18% d. 11.73% e. None of the above

83. Obtain the effective return to a US investor who invests in the Indian SENSEX stock index during the year
when the index gained 17.5 % but the rupee depreciated by 12% against the dollar. a. 17.5 % b. 5.5% c. 12% d. 3.4% e. 31.6%

84. Compute the effective return to a US investor who purchased the FTSE Index during the year when the
index gained 18 % and given the dollar price of the pound was $1.4565 at the beginning of the year and $1.4875 at the end of the year. a. 20.51% b. 15.49% c. 18% d. 15.12% e. None of the above

PART B: 1. Aviva (USA) is considering opening a factory in Hungary. The following data are given. a) The initial investment is 2.5 billion Forint. (Ans. = $1.163m) b) Current exchange rate (forint/$) = 2150 [try F/$ = 227.15 or 208 F/S as of Dec 2010]. The spot rate is expected to move according to the PPP between the U.S. and Hungary. U.S. and Hungarian inflation rates are expected to average 5 and 15 percent per year respectively over the investment period.

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c) Remittable operating cash flows in local currency are estimated to be as follows:

t 1 2 3 4 5 Cash flow (in millions) 300 375 450 600 720

The applicable discount rate is 17% (Ans. = $515,053)

d) Lost sales from existing operation will cost Aviva an average of $50,000 per year. The applicable
discount rate is 17% ( Ans. = - $159,967) e) The project will generate a net-of-tax depreciation allowance of $120,000 per year for five years (Appropriate discount rate is 12%) (Ans. = $ 432,573) f) Extra tax benefits of $15,000 per year can be generated with an applicable discount rate of 15%. (Ans. = $50,282) g) At the end of the five year project life the nominal salvage value (in local currency) is expected to be 20% of the original cost in local currency (appropriate discount rate is 18%). (Ans. = $64502) Should Aviva build this factory? (Use APV as a decision rule). [Answer: - $260,401] 2. Aviva (USA) is considering opening a factory in Hungary. The following data are given. a) The initial investment is 1 billion Forint. (Ans. = $5m) b) Current exchange rate ($/Forint) = 0.005[try $/F = .004092]. The forint is expected to depreciate against the dollar by10% per year over the investment period. c) Remittable operating cash flows in local currency are estimated to be as follows: T 1 2 3 4 5 Cash flow (in millions) 300 375 450 600 720

The applicable discount rate is 15%. [Ans = $5,583,059]

d) Lost sales from existing operating will cost Aviva an average of F30m per year. The applicable
discount rate is 10%. e) The project will generate a net-of-tax depreciation allowance of F65m per year for five years (Appropriate discount rate is 10%). f) Extra tax benefits of F3.5m per year can be generated with an applicable discount rate of 10%. (Answer for d+e+f = $548,641) g) At the end of the five year project life the nominal salvage value (in local currency) is expected to be 15% of the original cost in local currency (appropriate discount rate is 15%). [ Ans = $220,183] Should Aviva build this factory? (Use APV as a decision rule). [Answer: $1,351,884]

Typical Questions for problems 1 and 2.

Use the information provided above to answer the following questions. I) What is the value of the initial investment in dollar terms? 15

II) III) IV)

What will be the applicable exchange rate at the end of year 5? What is the present value, in dollars, of the year 5 cash flow from operations? Obtain the present value in dollars of the salvage described in the problem.

3. A-Z Corporation would like to borrow for 6 months in Yen and Euro. The following market information is available to the company. Mean effective 6-month rate on Yen = 4 % Mean effective 6- month rate on Euro = 10% Std. Dev for Yen effective rate = 0.10 Std. Dev for Euro effective rate = 0.25 Correlation of Yen and Euro effective rates = 0.35

a) What is the expected effective financing rate and the Std. Dev of effective financing if the portfolio
contemplated by A-Z Corp consists of 35% Yen and 65% Euro? [ Rip = 7.9%; i p = 17.78% ]

b) Assume now that the Yen and the Euro are perfectly negatively correlated.
Compute the relevant weights for the Yen and the Euro to construct a portfolio with zero risk and obtain the resultant effective financing rate. [w1 = 5/7; w2 = 2/7; Ri p = 5.71%] 4. The following are expected returns and risks of US and UK assets. US UK

Expected return 10% 14% Risk 15% 20% (i) = 1 (ii) = -1 (iii) = .35 (iv) = - .55 a) Compute the expected return and risk of a portfolio made up of the following proportions of US and UK assets: US: 80%, 60%, 45%, 25%, 15% UK: 20%, 40%, 55%, 75%, 85%
(try for 4 values of ; 5 combinations of US and UK)

b) For the case of = -1, compute the relevant weights for US and UK to construct a portfolio with zero risk and calculate the expected return on such a portfolio. [w1 = 57.14%; w2 = 42.86%] [Rip = 11.71%] 5. Assume that it is now January 2010. AZDT Inc. (US) expects to receive cash dividends from a joint venture in India over the next five years. The first dividend of Rs 2 million will be paid in December 2010. The dividend is then expected to grow at an annual rate of 10% over the following four years. The current exchange rate (Rs/$) is 45 and AZDTs average weighted cost of capital is 10%. a. Compute the dollar present value of the expected rupee dividend stream if the dollar is expected to depreciate by 5% per year against the rupee over the investment period. b. Obtain the dollar present value of the expected rupee dividend stream if the rupee is expected to depreciate by 10% per year against the dollar over the investment period c. What is the dollar present value of the expected rupee dividend stream if the exchange rate remains constant over the investment period? a) Ans = $236, 251 b) Ans = $148,919 c) Ans = $202,020

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Answers to Sample Multiple Choice Questions III Answers to Sample Multiple Choice Questions III
1) 2) 3) 4) 5) 6) 7) 8) 9) D B A B D A B C A % change in pound = $2.05 - $1.95 5.1% $1.95 Effective financing rate = (1 + 6%)(1 + 5.1%) 1 = 11.4% 11) B 12) A % change in NZ$ = $.48 - $.52 -7.7% $.52 Effective financing rate = (1+ 6.5%)(1 -7.7%)) 1 -1.7% 13) E 14) C 15) A MYR 1,500,000 x $.25 = $375,000 (MYR 1,500,000 x 1.07) x $.28 = $449,400 16) C [(1.06) x (.0035/.005 1)] 1 = -25.8% 17) E 18) B [(1.08) x (1+(F-S)/S ] 1 = [(1.08) x (1+(.00010-.00012)/.00012]-1 = -10.00% 19) C [(1.08) x (1+(St-So)/So] - 1 = [(1.08) x (1+(.00011-.00012)/.00012] 1 = -1.00% 20) B When IRP holds, the foreign financing cost (when covering with a forward hedge) is approximately equal to the domestic financing 21) B Cost = (.3)(.04) + (.7)(.01) = 1.90% 22) B {(.3)2 (.1)2 + (.7)2 (.2)2 + 2(.3)(.7)(.1)(.2)(.23)}1/2 =.1498 23) F 24) E 25) E 26) D 27) E 28) A 29) C 30) B 31) A 32) C 33) D 34) B 35) A 36) B 37) A 38) 39) E B 59) B 60) A 61) B 62) D 63) A 64) C 65) C 66) B 67) B 68) E 69) E 70) B 71) D 72) D 73) C 74) C 75) E 76) A 77) B 78) D 79) C 80) D

10) E

40) A 41) C 42) D 43) B 44) B 45) E 46) A

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47) C 48) A 49) B 50) D 51) A 52) D 53) A 54) A 55) C 56) C 57) 58) A C
Revised 11/2010

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