You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF
21 million. The cash flows from the project would be SF 5.9 million per year for the next five years. The dollar required return is 14 percent per year, and the current exchange rate is SF 1.11. The going rate on Eurodollars is 4 percent per year. It is 2 percent per year on Euroswiss.
Use the approximate form of interest rate parity in calculating the expected spot rates.
A) Convert the projected franc flows into dollar flows and calculate the NPV.
B) What is the required return on franc flows?
C) What is the NPV of the project in Swiss francs?
D) What is the NPV in dollars if you convert the franc NPV to dollars?
Use the approximate form of interest rate parity in calculating the expected spot rates.
A) Convert the projected franc flows into dollar flows and calculate the NPV.
B) What is the required return on franc flows?
C) What is the NPV of the project in Swiss francs?
D) What is the NPV in dollars if you convert the franc NPV to dollars?
1 answer:
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Answer:
option (C) - 6.11%
Explanation:
Data provided :
Coupon rate one year ago = 6.5% = 0.065
Semiannual coupon rate = = 0.0325
Face value = $1,000
Present market yield = 7.2% = 0.072
Semiannual Present market yield, r = = 0.036
Now,
With semiannual coupon rate bond price one year ago, C
= 0.0325 × $1,000
= $32.5
Total period in 15 years = 15 year - 1 year = 14 year
or
n = 14 × 2 = 28 semiannual periods
Therefore,
The present value =
=
or
= $32.5 × 17.4591 + $1,000 × 0.37147
= $567.42 + $371.47
= $938.89
Hence,
The percent change in bond price =
=
= - 6.11%
therefore,
the correct answer is option (C) - 6.11%