Q.

6 Bid price Ask price Spread

0.53 0.55 3.64%

Q.8 No, it should not hedge: if contracts are invoiced in $ the exporter will receive relatively more. No e Moreover, if $ appreciates, GBP will depreciate and thus UK exports will become relatively cheape Q.10 Direct GBP:Euro Indircet Euro: GBP Q.11 GBP:Zloty GBP:Yen Yen:Zloty

0.69 1.46

1 1

0.17 0.01 34

1 1 1

Q.18 Exch.rate was GBP:C$ 0.43 1 Airport GBP:C$ 0.4 1 GBP:Peso 0.06 1 Peso:C$ 7.27 1 Tourist cash 1500 Peso200 C$ Peso:C$ 7.5 1 I should accept the tourist's offer because his exchange rate of C$ is better.

receive relatively more. No exposure risks. ll become relatively cheaper which is an advantage for the exporter (US consumers will buy more of its prod

ers will buy more of its products).

Q.4 F S n Premium 0.05 0.05 90 3.98

Q.5 A forward contract can backfire if MNC is an importer and there was a fall in the value of the curren Q.12 a Seller of a Call-option Premium per Unit 0.01 Units 50000 Strike 0.55 Spot 0.63 Loss 3500 Q.13 a Seller of a Put-option Premium per Unit 0.02 Units 50000 Strike 0.42 Spot 0.4 Gain 0.00

all in the value of the currency, if Spot rate on the day the forward was exercised was lower than fixed Forwa

d was lower than fixed Forward rate.

Year 0

Year 1

Year 2

A. NZ Financing. Yes, the project should be accepted. Cunulatice NPV (F24) is > 0. in NZ $ - Subsidiary Perspective 1 Demand (units) 40,000.00 50,000.00 2 Price per Unit 500.00 511.00 3 Total Revenue 20,000,000.00 25,550,000.00 Variable Cost per 4 Unit 30.00 35.00 5 Total Variable Cost 1,200,000.00 1,750,000.00 6 Fixed Costs 6,000,000.00 6,000,000.00 7 Interest Expense 2,800,000.00 2,800,000.00 Non-cash Exp. 8 (Depreciation) 5,000,000.00 5,000,000.00 Total Expenses 9 (5+6+7+8) 15,000,000.00 15,550,000.00 Operating Income 10 (before tax) (3-9) 5,000,000.00 10,000,000.00 11 Local Taxes (30%) 1,500,000.00 3,000,000.00 Operating Income (after tax) = Net 12 Income 3,500,000.00 7,000,000.00 Net CF to 13 Subsidiary (12+8) 8,500,000.00 12,000,000.00 Funds Remitted by 14 Subsidiary (100%) 8,500,000.00 12,000,000.00 15 Withholding Tax 0.10 0.10 Funds Remitted to 16 Parent (Tax Credit) 7,650,000.00 10,800,000.00 17 Salvage Value in Euro - Parent Perspective 18 Exchanfe Rate of Salvage Value 19 NZ$ 0.52 0.54 20 CF to Parent 3,978,000.00 5,832,000.00 21 PV of Parent's CF 3,315,000.00 4,050,000.00 Initial Parent's 22 Investment 25,000,000.00 23 Rate of Return 0.20 0.20 24 Cumulative NPV 21,685,000.00 17,635,000.00 Alternative Parent's own financing, NO local Debt at all. No, it is less feasible, NPV B. (F42) will be smaller than in case A (F24). The benefit of taxation is lost. in NZ $ - Subsidiary Perspective Operating Income (bt) (exclude Interests) Operating Income (at) CF to Net Subsidiary Funds Remitted to Parent (Tax Credit)

7,800,000.00 12,800,000.00 5,460,000.00 8,960,000.00 10,460,000.00 13,960,000.00 9,414,000.00 12,564,000.00

Salvage Value in Euro - Parent Perspective Salvage Value CF to Parent PV of Parent's CF Initial Parent's Investment Cumulative NPV 4,895,280.00 4,079,400.00 35,000,000.00 30,920,600.00 26,209,100.00 6,784,560.00 4,711,500.00

If NPV is still positive but a benchmark is low (!), e.g. 8%, I should watch out for all the risks and doubt the feasibility of the project (if I really need it!) The rate of loan is 14% and rate of return is 20%, the loan will be cheaper for the project!!! Loan %-rate has a tax benefit. Taking loan is ususally beneficial because it will be deducted! It is better for the project to take the loan. I never recover my working capital 100%. I sell it cheaper. If I keep the exchange rate fixed, I do not get the benefit of NZ$ appreciation! If the exchange rate depreciates, hugely, it might totall wipe out the tax In A if exchange rate depreciates NPV decreases! benefit.

SO: I should do different scenarios (simulate different exchange rates, adding and not working capital back to the Parent). Market devils: probabilities of sales = demand (-10% of the forecast), material price, labour costs, exchange rate, salvage value, % rates of borrowing, taxes . What do I base my forecasting/probabilities on?

* Risks and Opportunities (!) should always be included down the spreadshit, and present different scenarios. Discount rate is a probably return I expect. For discounting we use CF (!) Not Net Income. The cost of MY money is the discount Rate (!) Id the majority of the money comes from the Subsidiary's country, I should take local discount rate. But f the majority money comes from the Parent, I should take for calculations the expected Rate of Return. A strong exchange rate is always a positive scenario! A depreciating currency is a conservative scenario. A finance manager always bases his calculations on forecast (and an account on the past). From the Parent's perspective NPV would be more sensitive to exchange rate movements if the Parent invested more of its own funds, because NZ$ appreciates, costs more of Euro, and thus at the end of each period the Parent would receive less than it could in case the exchange rate was in its favour. Exchange rate exposure will be higher! So I have zero-exchange rate exposure if all money is local. Local money is C. exposed to no exchange rate risks. If I have a chance, I should always take alocal loan.

Sub sidia ry Pers Funds are blocked until the Subsidiary is sold. NPV will be better than in case B but D. pect worse than in case A. ive Reinvestment Rate 0.06 0.06 Amount Reinvested 510,000.00 1,260,600.00 Net CF to Subsidiary Funds Remitted to Parent (Tax Credit) Euro - Parent Perspective CF to Parent after Salvage PV of Parent's CF NPV Delayed cash is always worse that cash today!

Minimum / Break-even Salvage Value (SV) in Case A => (Funds Remitted to Parent + SV)/(1+20%)3d degree = Cum.NPV after year E. 2 => SV = p.479 of the Book in NZ$ =

I always make decisions today! At t0. I have to discount Proposed sale price for 1 year too. But there are nonquanive factors: I can choose to take 27 mlln now and get rid of that project. If I change discount rate (up to 30%), selling the project now would be more attractive. No, Wolverine should not divest the Subsidiary after one year since NPV will be less F. compared to that of at the end of year 3. Sale price is < that PV of all my future CFs. Proposed Sale Price 27,000,000.00 CF to Parent after Selling 30,978,000.00 PV of a Parent's CF 25,815,000.00 4,860,000.00 NPV after Selling after one year 815,000.00 NPV after Salvage after 3 years ### If an exporter decides to produce locally, he should consider other CFs (lisencing, etc)

Multiple Choice Questions Q.9 Funds in % Funds in GBP from Total Euro 500,000.00 0.63 C$ 300,000.00 0.38 Total 800,000.00 1.00 Q.11 Funds Percentage TWD 0.25 Standard Deviation 0.07

Standard Deviation 0.08 0.03

Correlation 0.30

Correlation 0.70

Portfolio Standard Deviation 0.05

EGP

0.75

0.05

0.70

0.05

Year 3

ice NPV (F24) is > 0. 60,000.00 530.00 31,800,000.00 40.00 2,400,000.00 6,000,000.00 2,800,000.00 5,000,000.00 16,200,000.00 15,600,000.00 4,680,000.00 PV of CF to Subsidiary Initial Parent's Investment Salvage Value Cumulative NPV

in NZ $ - Subsidiary Perspec 7,083,333.33 ###

42,916,666.67

10,920,000.00 15,920,000.00 15,920,000.00 0.10 14,328,000.00 52,000,000.00 29,120,000.00 0.56 37,143,680.00 21,495,185.19 checking break-even SV 30,473,280.00 17635000

we did not include loan in CF that's why we should not ecxlu we care in case A about the burden of % of the loan

8,023,680.00

0.20 Benchmark 3,860,185.19 15.44%

, it is less feasible, NPV xation is lost.

18,400,000.00 12,880,000.00 17,880,000.00 16,092,000.00

70,000,000.00

39,200,000.00 48,211,520.00 27,900,185.19 Benchmark 1,691,085.19 4.83%

g. 8%, I should watch out ect (if I really need it!)

e loan will be cheaper ng loan is ususally r the project to take the

eaper. nefit of NZ$

tall wipe out the tax

nt exchange rates,

% of the forecast), value, % rates of obabilities on?

ded down the

ounting we use CF (!) nt Rate (!) Id the country, I should take from the Parent, I turn. ! A depreciating ger always bases his ).

e to exchange rate ecause NZ$ appreciates, Parent would receive less xchange rate exposure will ney is local. Local money is ould always take alocal loan.

better than in case B but

38,190,600.00 34,371,540.00

48,368,062.40 27,990,776.85 2,990,776.85

22,449,600.00 40,088,571.43

oposed sale price for 1 year 27 mlln now and get rid of the project now would be

ear since NPV will be less at PV of all my future CFs.

25,794,222.22 30,654,222.22

er other CFs (lisencing, etc)

Portfolio Standard Deviation in % = 0.05 5.44%

olio Standard Deviation in % =

5.13%

$ - Subsidiary Perspective 8,333,333.33 9,212,962.96 not including working capital because it does not belong to Subsidiary, not from my own pocket ### ###

34,583,333.33

we should not ecxlude it now of the loan

14,912,592.59

Problem 7

Year 0

Year 1

Year 2

Yes, Blore will be able to acquire Target for a price (C18) lower than its valuation of the Target (F17 in MYR - Target's Perspective 1 Revenue 200,000,000.00 216,000,000.00 2 Cost of Goods sold (CGS) 3 Gross Profit 4 Additional Expenses (S&A) 5 Depreciation Earnings before tax EBT 6 (3-4-5) Earnings after tax EAT 7 (35%) = Net Income 8 Funds to reinvest Net CF = Funds Remitted by Target 9 (100%) 10 Salvage Value 11 Target's Stock Price 12 Shares Outstanding 13 14 15 16 17 18 Exchange Rate Salvage Value CF to Buyer PV (Discount Rate 20%) Cumulative NPV Target's Market Value 100,000,000.00 108,000,000.00 100,000,000.0 108,000,000.0 0 0 30,000,000.00 20,000,000.00 30,000,000.00 20,000,000.00

50,000,000.00 58,000,000.00 32,500,000.00 7,000,000.00 37,700,000.00 7,000,000.00

45,500,000.00 50,700,000.00 30.00 9,000,000.00 in GBP - Buyer's Perspective 0.25 0.25 11,375,000.00 9,479,166.67 9,479,166.67 67,500,000.00 0.03 3.45% Year 0 (30MYR + 30MYR * Pr) * 9 mln. Shares * 0,25 = F17

0.25 12,675,000.00 8,802,083.33 18,281,250.00

Max Premium on Shares 19 affordable 20 Max Premium in % Problem 11

Year 1

Year 2

1 2 3 4 5 6 7 8 9 10

in Peruvian new sol - Target's Perspective Initial Alaska's Outlay 1,000,000,000.00 CF of the Target 500,000,000.00 525,000,000.00 551,250,000.00 1,200,000,000.0 Salvage Value 0 in Pounds - Buyer's Perspective Exchange Rate 0.19 0.19 0.18 Salvage Value 216,000,000.00 CF to Buyer 99,750,000.00 315,225,000.00 PV (Discount Rate 18%) 84,533,898.31 226,389,686.87 Initial Alaska's Outlay 190,000,000.00 120,923,585.1 Cumulative NPV 105,466,101.69 8 Max Alaska's affordable Outlay ### in Pounds ### in Peruvian new sol

Year 3 If Inflation assumed yes yes yes

ation of the Target (F17). 233,280,000.00 116,640,000.00 No Inflation assumed 116,640,000.0 0 30,000,000.00 Straight-Line SL 20,000,000.00 Depreciation

66,640,000.00 If we knew EBT at Year 0, we could use it as Target's earning potential (benchmar 43,316,000.00 7,000,000.00 56,316,000.00 300,000,000.00

0.25 75,000,000.00 yes 89,079,000.00 No withholding tax 51,550,347.22 69,831,597.22 Max value Buyer is ready to pay. It goes beyond the price with min Premium of 10

9 mln. Shares * 0,25 =

g potential (benchmark for buying)

with min Premium of 10%! I would not buy it if Shareholders claim min Pr.