FINA4320 International Financial Management

FINA4320 International Financial Management Quantitative Problems (25 Points in total) Submit your answers with an Excel file on Canvas. Your answers must include Excel functions or formulations. Problem 1 (10 points) Global Trade Inc. is considering a foreign investment with a useful life of 6 years through its subsidiary in Spain to manufacture car parts and initial investment amount is 17,000,000 €. From this investment, the subsidiary expects 300,000 units of sales in the first year, which is expected to grow 10% for year 2 and 3, 5% in year 4, 4% in year 5 and remain the same in year 6. Additionally, the subsidiary expects to sell those parts for 25 € during the first three years of the project and for 30 € in the following years. Variable manufacturing cost is 10 € per unit during the first three years of the project and for 12 € in the following years. The subsidiary will have 2,000,000 € fixed costs each year, total depreciation expense of the project will be 9,000,000 € and company uses straight line depreciation. The company expects to sell the investment for 8,000,000 € after all taxes at the end of 6 years. For working capital, subsidiary will borrow 5,000,000 € from a Spanish bank which is subject to 8% annual interest and will be transferred to the buyer of the project at the end of 6 years. The subsidiary is subject to 21% corporate tax, additionally, the firm will pay 15% withholding tax for remittances abroad except for capital transfers. Spot EUR/USD exchange rate is 1.08 and CFO of Global Trade Inc. expects the exchange rate to appreciate within the next 3 years by a normally distributed probability with 5% mean and 2% standard deviation each year, then, each year thereafter depreciate by a normally distributed probability with 3% mean and 1% standard deviation. Global Trade Inc. has $60 million worth of bonds outstanding with 7% annual coupon rate and 6% annual yield to maturity. The company’s 40 million shares of common stock sell for $1.25 per share and have a beta of 1.5. The risk-free rate is 4%, and the market return is 10%. Tax rate is 21%. a. Calculate Net Present Value and Internal Rate of Return of the project from Global Trade Inc. perspective. b. Simulate NPV 500 times and calculate an approximate average NPV. Do you recommend this investment? c. Ignore CFO’s exchange rate expectations and assume spot rate will remain the same for the next 6 years. Calculate the number of units that the company should sell for the project to have an IRR equal to company’s cost of capital. Problem 2 (8 Points) Husky Corp is a US firm with a subsidiary in South Africa and Zebra Corp is a South African firm with a subsidiary in the US. Husky has AA credit rating and can borrow in the US with 7% interest for USD, and can borrow in South Africa with 11% interest for ZAR. Zebra has BBB rating and can borrow ZAR in South Africa with 12% interest and USD in the US with 9.5% interest. Spot Exchange rate is 0.8 USD for each ZAR and borrowing required is $5,000,000. You are working for an investment bank and will offer a Swap deal to both companies which today will equally benefit both companies while managing their currency exposure. a. Define the terms of Swap contract for each company (Interest rate, currency received/paid) b. Define Swap Bank’s currency exposure and calculate Swap Bank’s annual profit assuming constant foreign exchange rate. Problem 3 (7 Points) Vix Co. (of the U.S.) presently serves as a distributor of products by purchasing them from other U.S. firms and selling them in Europe. It wants to purchase a manufacturer in Thailand that could produce similar products at a low cost (due to low labor costs in Thailand) and export the products to Europe. The operating expenses would be denominated in Thai currency (the baht). The products would be invoiced in euros. If Vix Co. can acquire a manufacturer, it will discontinue its existing distributor business. If Vix Co. purchases a company in Thailand, it expects that its revenue might not be sufficient to cover its operating expenses during the first 5 years. It will need to borrow funds for a 5-year term to ensure that it has enough funds to pay all of its operating expenses in Thailand. It can borrow funds denominated in U.S. dollars, in Thai baht, or in euros and will need $10,000,000 today. Within the next 5 years, Baht is expected to depreciate by 2% annually, and Euro is expected to appreciate by 1.5% annually. Assuming those exchange rate expectations and borrowing costs below, which currency should it borrow? (Loan interests will be paid annually and principal will be paid at maturity) Interest rate USD 5% Baht 6% Euro 3% Spot Exchange Rate (USD) 1 0.8 1.05