Value of Payables 177400 177400 176600 OR Average Cost d Which option is best

# Value of payables 177400 177400 176600 or average

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Value of Payables = \$177,400 \$177,400 \$176,600 OR Average Cost d) Which option is best? Why? 1 Mark Answer: The best option is \$.03 premium because on average, it is slightly better than the other two options available. Exercise Price Exercise Price Exercise Price = \$1.74; = \$1.76; = \$1.79; Premium = \$.06 Premium = \$.05 Premium = \$.03
Total 20 Marks 6. Country Risk Ratings . Assauer Inc. would like to assess the country risk of Glovanskia. Assauer has identified various political and financial risk factors, as shown below. (High numbers are good!) Political Risk Factor Assigned Rating Assigned Weight Blockage of fund transfers 5 20% Bureaucracy 4 80% Financial Risk Factor Assigned Rating Assigned Weight Interest rate 1 10% Inflation 4 10% Exchange rate 5 40% Competition 4 20% Growth 5 20% Assauer has assigned an overall rating of 60 percent to political risk factors and of 40 percent to financial risk factors. Assauer is not willing to consider Glovanskia for investment if the country risk rating is below 4.0. a) Should Assauer consider Glovanskia for investment? Show calculations . 4 Marks Answer: Determine the combined country risk rating: Political risk rating = (5 × 20%) + (4 × 80%) = (1 + 3.2) = 4.2 Financial risk rating = (1 × 10%) + (4 × 10%) + (5 × 40%) + (4 × 20%) + (5 × 20%) = (0.1 + 0.4 + 2 + 0.8 + 1) = 4.3 Weighted rating = (4.2 × 60%) + (4.3 × 40%) = (2.52 + 1.72) = 4.24 Since the weighted rating is above 4.0, Assauer should probably consider the investment. b) Is this a macro or a micro risk assessment? Explain. 4 Marks Answer: This is a macro risk assessment because the political conditions (bureaucracy and Blockages of funds transfer) fund in the country is the major issue and bureaucracy is weighting 80% in the political risk. Every industry coming into the country are affected by the bureaucracy except those that are unique to a particular firm or industry. Bureaucracy remains the same for a long period regardless of the firm or industry of concern. 7. Atro Co. (a Canadian firm) considers a foreign project in which it expects to receive 10 million euros at the end of one year. While it realizes that its receivables are uncertain, it definitely decides to hedge receivables of 10 million euros with a forward contract today. As of today, the spot rate of the euro is \$1.20, while the one-year forward rate of the euro is presently \$1.24, and the expected spot rate of the euro in one year is \$1.19. The initial outlay of this project is \$7 million. Atro has a required return of 16%.
a. Estimate the Net Present Value of this project based on the expectation of 10 million euros in receivables, and the use of a forward contract. 6 Marks Answer: Dollar cash flows = 10,000,000 euros × \$1.24 = \$12,400,000 NPV = (\$12,400,000/1.16) – \$7,000,000 = \$3,689,655 b. If the risk associated with the project increases and Atro Co. needs to redo the analysis clearly describe the two ways the Atro Co. can incorporated this increased risk into the capital budget analysis of the net present value of the project. 6 Marks Answer: If suppose the Financial condition in the country is not up to the expectation and if Atro Co. is supposed to receive 7 million euros instead of 10 million euros Dollar cash flows = 7,000,000 × \$1.24 = \$8,680,000 But the forward contract on the remaining 3,000,000 euros converts to (\$1.24 – \$1.19) ×

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• Summer '19
• Finance, United States dollar, dollar, ISO 4217

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