Exam Question - ABRS

APPROVEDEXAMINATION PAPER: ACADEMIC SESSION 2008/2009CampusSchoolDepartmentCourse CodeCourse TitleLevelDurationMaritime GreenwichBusinessAccounting & FinanceFINA0033International Corporate Finance (MSc)MTHREE HOURSDate May 2009Course Co-ordinator: Dr Jian ChenINSTRUCTIONS TO CANDIDATES:Answer FOUR questions.All questions carry equal marks.This is a closed book examination.May 2009Course Title International Corporate Finance (MSc)Course Code FINA0033Page 1 of 5

APPROVEDwonders if she should hedge this transaction exposure. She has the following quotesfrom Bank of Hawaii:Spot rate (T$/$) 33.403-month forward rate (T$/$) 32.403-month Taiwan dollar deposit rate 1.500%3-month US$ borrowing rate 8.000%3-month call option on T$not availableAnalyse the costs and risks of the below alternative strategies,a) Do Nothing -- Wait 3 months and buy T$ spot. 6 marksb) Buy T$ forward 3-months. 7 marksMoney Market Hedge: Exchanging US$ for T$ now, depositing for 3-months untilpayment.d) Which of the above alternatives should Susan recommend and why? 3 marksTotal 25 marksQuestion Foura) Use the following information to calculate the weighted average cost of capital forABC Inc.Cost of equity 14% Personal tax rate 37%Cost of debt 8% Value of equity $50,000,000Value of current assets $15,000,000 Value of debt $20,000,000Value of fixed assets $55,000,000 Cost of preferred stock 10%Corporate tax rate 35%5 marksHow are the Shareholders of target firms typically paid?c) How do you calculate:i. Net working Capital 2 marksii. Net Operating Profit after taxes (NOPAT)2 marksFree cash flowsWhat does it impliy in terms of the equity value vs. shareholders’ investment if thefirm’s market to book ratio is currently greater than 1?In the academic paper from Altunbas and Ibanes [2004], “Mergers andAcquisitions and bank Performance in Europe, the role of strategic similarities”what are the main conclusions?Total 25 marksMay 2009Course Title International Corporate Finance (MSc)Course Code FINA0033Page 3 of 5

APPROVEDQuestion FiveWhy in some aspects, are internationally diversified portfolios the same inprinciple as a domestic portfolio? In addition should an internationally diversifiedportfolio result in a portfolio with a lower or a higher beta than a purely domesticportfolio?A US investor makes an investment in Britain and earns 14% on the investmentwhile the British pound appreciates against the US dollar by 8%. What is theinvestor’s total return?A US investor is considering a portfolio consisting of 60% invested in the USequity index fund and 40% invested in the British equity index fund. The expectedreturns are 10% for the US and 8% for the British. The standard deviations are20% and 18% for the US and British, respectively. The correlation coefficient isof 0.15 between the US and British equity funds. What are the expected return andstandard deviation of the portfolio?d) Why is a portfolio diversification beneficial to the investor? Does the internationaldiversification of a portfolio results in lower diversifiable risk of the portfolio?5 marksA Canadian based investor purchases a Standard & Poors index (SPY) at theAmerican Stock Exchange, in US dollars. Over the course of the year the USdollar appreciates 8% against the Canadian dollar, and the S&P index rises 22%.What is the approximately total return to the Canadian investor in Canadiandollars? What if the US dollar depreciates by 2%?Total 25 marksQuestion Six – see overleafMay 2009Course Title International Corporate Finance (MSc)Course Code FINA0033Page 4 of 5

APPROVEDQuestion SixWhat is real option analysis? How is it a better method of making investmentdecisions than traditional capital budgeting analysis?b) XYZ incorporation, a US company is considering an expansion of their productline in France. The expansion would require a purchase of equipment with a priceof EUR 1,200,000 and additional installation of EUR 300,000 (assume that theinstallation costs cannot be expensed, but rather, must be depreciated over the lifeof the asset). Because this would be a new product, they will not be replacingexisting equipment. The new product line is expected to increase revenues byEUR 600,000 per year over current levels for the next five years, however;expenses will also increase by EUR 200,000 per year (Note: assume the after-taxoperating cash-flows in year 1-5 are equal, and that the terminal value of theproject in year 5 may change total after-tax cash flows for that year). Theequipment is multipurpose and the firm anticipates that they will sell it at the endof the five years for EUR 500,000. The firm’s required rate of return is 12% andthey are in the 40% tax bracket. Depreciation is straight-line to a value of EUR 0over the 5-year life of the equipment and the investment also requires an increasein the NWC of EUR 100,000 (to be recovered at the sale of the equipment at theend of five years). The current spot rate is $0.95/EUR, and the expected inflationrate in the US is 4% per year and 3% per year in Europe.i. In Euros, what is the net present value of XYZ corporation expansion?3 marksii. What is the IRR of XYZ corporation expansion?iii. What are the annual after-tax cash follows for XYZ corporation project?3 marksiv. Would the European expansion, have a greater NPV in dollar terms if theEuro appreciated in value over the five-year life of the project, otherthings equal?v. What is the NPV of the French expansion if XYZ Corporation firstcomputes the NPV in Euros and then converts that figure to dollars usingthe current spot rate?Total 25 marksMay 2009Course Title International Corporate Finance (MSc)Course Code FINA0033Page 5 of 5