536-7a_HW[1]

# 536-7a_HW[1] - 536-7a_HW 11S Topic 7 Global Financing P14.4...

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536-7a_HW, 11S FIN 536 – SU Page 1 of 19 Topic 7 Global Financing P14.4 – Solution WACC: SHOW ALL YOUR WORK CLEARLY Goldman Sachs Bank of NY Beta 1.2 1.16 K e Argentina 10.2% 13.432% WACC 8.336% 10.087% P16.2 – Solution COST OF DEBT: SHOW ALL YOUR WORK CLEARLY 1. \$ cost of borrowing pounds =1.31%. Why is the \$ cost smaller than Pound cost? EXPLAIN!!! 2. \$ cost of borrowing pounds =12.66%. Why is the \$ cost larger than Pound cost? EXPLAIN!!! P16.3 – Solution COST OF DEBT: SHOW ALL YOUR WORK CLEARLY 1. 3.06% P16.5 – Solution COST OF DEBT: SHOW ALL YOUR WORK CLEARLY 1. \$5.06% 2. \$4.86% 3. \$5% €-denominated bond is the best choice .

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536-7a_HW, 11S FIN 536 – SU Page 2 of 19 Exam Sample Problem 1 A US company needs to borrow \$1M or SF equivalent for 6 months. The following information is available: FX market Money Market S = 1.2015 SF/\$ , F 6m = 1.2233 SF/\$ 6-month \$ LIBOR = 5.0% 6-month SF LIBOR = 8.0% a) Alternative A: Borrow in Euro\$ . What is the \$ cost for Euro\$ borrowing? Ans: 5%. b) Alternative B: Borrow in SF with a forward hedging . How many SFs should you borrow? i) What is the SF cost for EuroSF borrowing? ii) What is the \$ cost for EuroSF borrowing? Specify each step. What causes the difference between k SF and k \$ ? Explain! iii) Compare Alternative A and B, which currency would you borrow? Ans: Borrow SF 1.2015M i) SF borrowing cost for SF borrowing: k SF = 8% ii) \$ borrowing cost for SF borrowing: 4.30% CF SF : Borrow SF 1 now……………………………. .Pay back SF 1.04 in 6 mths S: Buy \$ now at S Buy SF 1.04 now at F S = 0.8323\$/SF ……………………….……. F =0.8175 \$/SF (OR S = 1.2015 SF/\$ ……………………. .…. F = 1.2233 SF/\$) CF \$ : Receive \$0.8323………………………………Pay \$0.8502 \$ cost = 4.30% \$ traded at FP takes less \$s to pay back SF debt \$ cost reduced iii) Strategy B with lower \$ cost c) Alternative C: Borrow in SF without hedging. How many SFs should you borrow? What is the \$ cost for borrowing in SFs? Ans: Borrow SF 1.2015M i) What is the SF cost (k SF ) for borrowing in EuroSFs? ii) What is the \$ cost profile (k \$ ) for borrowing in EuroSFs? Specify each step. iii) Plot Strategy A & C on the same graph. Answer the following questions and plot them on the graph. a) If S = 1.2015 SF/\$ at maturity, what is the k \$ ? What causes the difference between k SF and k \$ ? Which currency will you borrow (strategy A or C)? b) What if S = 1.23 SF/\$ at maturity? c) What is the exchange rate that makes k \$ =0? d) What if S = 1.26 SF/\$ at maturity? e) What is the breakeven exchange rate between A&C? 0 6m
536-7a_HW, 11S FIN 536 – SU Page 3 of 19 Question K SF k \$ Answer and Explanation!! A What is the \$ cost (k \$ ) for Euro\$ borrowing? 5% ------ C What is the \$ cost (k \$ ) for EuroSF borrowing? Specify each step. 8%   1 * 2496 . 1 2 S Where S = \$/SF OR 1 2496 . 1 2 S Where S =SF/\$ CF SF : Borrow SF 1 now………. .…… Pay back SF 1.04 in 6 months S: S 0 = 0.8323\$/SF …………………. .. Leave it Open, S 1 CF \$ : Receive \$0.8323…….……….…. Pay \$ (1.2496*S -1 ) where S=\$/SF 1. If S = 1.2015 SF/\$ at maturity, what is the k \$ ?

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536-7a_HW[1] - 536-7a_HW 11S Topic 7 Global Financing P14.4...

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