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Chapter 5: Q10DQ (page 680)
What is a letter of credit?
A letter of credit is the document issued by the bank on behalf of the buyer that promises a specified amount of payment to the seller.
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What is meant by translation exposure in terms of foreign exchange risk?
Worldwide Scientific Equipment is considering a cash acquisition of Medical Labs for \(1.6 million. Medical Labs will provide the following pattern of cash inflows and synergistic benefits for the next 25 years. There is no tax loss carryforward.
Years 1–5 6–15 16–25 Cash inflow (aftertax) ...................... \)150,000 \(170,000 \)210,000 Synergistic benefits (aftertax) ......... 20,000 30,000 50,000
The cost of capital for the acquiring firm is 11 percent. Compute the net present value. Should the merger be undertaken?
From the base price level of 100 in 1979, Saudi Arabian and U.S. price levels in 2008 stood at 200 and 410, respectively. If the 1979 \(/riyal exchange rate was \)0.26/riyal, what should the exchange rate be in 2008? Suggestion: using purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.26.
An investor in the United States bought one-year Brazilian security valued at 195,000 Brazilian reals. The U.S. dollar equivalent was 100,000. The Brazilian security earned 16 percent during the year, but the Brazilian real depreciated 5 cents against the U.S. dollar during the period (\(0.51 to \)0.46). after transferring the funds back to the United States, what was the investor’s return on her \(100,000? Determine the total ending value of the Brazilian investment in Brazilian reals and then translate this Brazilian value to U.S. dollars. Then compute the return on the \)100,000.
Suppose a polish zloty is selling for $0.3414 and a British pound is selling for 1.4973. what is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a British pound?
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