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Fundamentals of corporate finance

# Fundamentals of corporate finance - Chapter 22 Key 1 The...

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Chapter 22 Key 1. The rate most international banks charge one another for overnight Eurodollar loans is called the: a. Eurodollar yield to maturity. B . London Interbank Offer Rate. c. Paris Opening Interest Rate. d. United States Treasury bill rate. e. international prime rate. Ross - Chapter 022 #7 SECTION: 22.1 TOPIC: LONDON INTERBANK OFFER RATE TYPE: DEFINITIONS 2. Long-run exposure to exchange rate risk relates to: a. daily variations in exchange rates. b. variances between spot and future rates. C . unexpected changes in relative economic conditions. d. differences between future spot rates and related forward rates. e. accounting gains and losses created by fluctuating exchange rates. Ross - Chapter 022 #47 SECTION: 22.6 TOPIC: EXCHANGE RATE RISK TYPE: CONCEPTS

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3. You are analyzing a project with an initial cost of £150,000. The project is expected to return £25,000 the first year, £55,000 the second year and £110,000 the third and final year. The current spot rate is £0.5086. The nominal risk-free return is six percent in the U.K. and 6.5 percent in the U.S. The return relevant to the project is 12 percent in the U.S. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars? E(S 1 ) = .5086 [1 + (.06 .065)] 1 = .506057 E(S 2 ) = .5086 [1 + (.06 .065)] 2 = .503526715 E(S 3 ) = .5086 [1 + (.06 .065)] 3 = .501009081 CF 0 = -£150,000 (\$1 £.5086) = \$294,927.25 CO 1 = £25,000 (\$1 £.506057) = \$49,401.55 CO 2 = £55,000 (\$1 £.503526715) = \$109,229.56 CO 3 = £110,000 (\$1 £.501009081) = \$219,556.90 NPV = \$294,927.25 + (\$49,401.55 / 1.12 1 ) + (\$109,229.56 / 1.12 2 ) + (\$219,556.90 / 1.12 3 ) = \$294,927.25 + \$44,108.53 + \$87,077.13 + \$156,276.26 = \$7,465 AACSB TOPIC: ANALYTIC Ross - Chapter 022 #83 SECTION: 22.5 TOPIC: HOME CURRENCY APPROACH TYPE: PROBLEMS 4. Which of the following statements are correct? I. The usage of forward rates can help reduce the short-run exposure to exchange rate risk. II. Accounting translation gains and losses are recorded in the equity section of the balance sheet. III. The long-run exchange rate risk faced by an international firm can be reduced if a firm borrows money in the foreign country where the firm has operations. IV. Unexpected changes in economic conditions are classified as short-run exposure to exchange rate risk. Ross - Chapter 022 #49 SECTION: 22.6 TOPIC: EXCHANGE RATE RISK TYPE: CONCEPTS