Discussion Problem Set 7_sols (1).docx

# Discussion Problem Set 7_sols (1).docx - Solutions to...

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Solutions to Problem Set 7 Spring 2018 1) 25% in U.K. and 75% in U.S. expected return = 6.75% Var of Portfolio = 0.0019 St. Dev. = 4.30% 25% in Spain and 75% in U.S. expected return = 7.5% Var of Portfolio = 0.0016 St. Dev. = 4.02 % Assuming both have the same risk-free rate, just take the ratio of R/stdev US, UK portfolio has the lower sharp ratio 2) \$ return on Mexican stock market = (1 + R peso ) ( 1 + % S(\$/peso) -1 = .5137 or 51.37% 3) a) euro cost of 10,000 shares of microsoft : = euro 226,087 sold stock for \$32/share and converted at \$1.18/euro = euro 271,186 Profit = euro 45,099 b) euro return = 0.1995 or 19.95% The exchange rate loss is 2.54% 4) See class discussion 5) Suppose Yen/\$ = Yen 110.66, ADR™ = \$108.08; Toyota Motor (yen) = Yen 5984; #underlying shares in 1 ADR = 2 Is \$108.08 close to (2)*(Yen 5984)/(Yen 110.66) = \$108.15. Yes. 6) See class discussion 7) Madura Ch. 14 #1) Discussed in class #13) a. Determine the NPV for this project. Should Brower build the plant?

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ANSWER: NPV = -\$91,339.03 Since the project has a negative net present value (NPV), Brower should not undertake it. b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8,700 cedis per U.S. dollar over the course of the three years? Should Brower construct the plant then? ANSWER: If the cedi was expected to remain unchanged the NPV = +\$14,519.78 If the value of the cedi remains constant, the NPV is positive. Thus, Brower should undertake the project in this case. Of course, the NPV is only slightly positive. Whether or not Brower actually undertakes the project depends on the confidence it has in its exchange rate forecasts. #17) a. Given that PepsiCo's investment in Brazil was entirely in dollars, describe its exposure to exchange rate risk resulting from the project. Explain how the size of the parent’s initial investment and the exchange rate risk would have been affected if PepsiCo had financed much of the investment with loans from banks in Brazil. ANSWER: As the earnings in Brazil are remitted, they will be converted to dollars. If Brazil’s currency depreciates against the dollar over time, there will be less dollar earnings received. If PepsiCo Inc. borrowed funds from banks in Brazil, the parent’s initial investment would have been smaller. Also, the payments by the subsidiary on loans in Brazil would cause less remitted earnings over time, and therefore less exchange rate risk. b. Describe the factors that PepsiCo likely considered when estimating the future cash flows of the project in Brazil. ANSWER: The demand in Brazil for the soft drinks and snacks produced by PepsiCo Inc. is dependent on the economy in Brazil, consumer habits, country regulations, and the competition. PepsiCo apparently expects an increased demand for soft drinks and snacks as the economy improves. c. What factors did PepsiCo likely consider in deriving its required rate of return on the project in Brazil?
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