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Chapter 5: Q4DQ (page 679)
Explain how exports and imports tend to influence the value of a currency
The exports and imports affect the demand for foreign and domestic goods, influencing the currency's value.
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Chicago Savings Corp. is planning to make an offer for Ernie’s Bank & Trust. The stock of Ernie’s Bank & Trust is currently selling for \(44 a share.
a.If the tender offer is planned at a premium of 50 percent over market price, what will be the value offered per share for Ernie’s Bank & Trust?
b.Suppose before the offer is actually announced, the stock price of Ernie’s Bank & Trust goes to \)60 because of strong merger rumors. If you buy the stock at that price and the merger goes through (at the price computed in part a), what will be your percentage gain?
c.Because there is always the possibility that the merger could be called off after it is announced, you also want to consider your percentage loss if that happens. Assume you buy the stock at \(60 and it falls back to its original value after the merger cancellation, what will be your percentage loss?
d. If there is an 80 percent probability that the merger will go through when you buy the stock at \)60, and only a 20 percent chance that it will be called off, does this appear to be a good investment? Compute the expected value of the return on the investment.
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?
What is the danger or concern in floating a Eurobond issue?
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.
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