536-7a_HW[1]

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

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
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 .
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
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 $ ?
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 19

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

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online