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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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What procedures would you recommend for a multinational company in studying exposure to political risk? What actual strategies can be used to guard against such risk?
You are the vice president of finance for exploratory resources, headquartered in Houston, Texas. In January 20X1, your firm’s Canadian subsidiary obtained a six-month loan of 150,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. \(0.8995/ Canadian dollars and the Canadian currency was selling at a discount in the forward market. The June 20X1 contract (face value = C\)150,000 per contract) was quoted at U.S. $0.8930/ Canadian dollar.
a. Explain how the Houston bank could lose on this transaction assuming no hedging.
b. If the bank does hedge with the forward contract, what is the maximum amount it can lose?
The Jeter Corporation is considering acquiring the A-Rod Corporation.
The data for the two companies are as follows:
A-Rod Corp. Jeter Corp.
Total earnings ......................................................... \(1,000,000 \)4,000,000
Number of shares of stock outstanding ................. 400,000 2,000,000
Earnings per share ................................................. \(2.50 \)2.00
Price-earnings ratio (P/E) ....................................... 12 15
Market price per share ........................................... \(30 \)30
a.The Jeter Corp. is going to give A-Rod Corp. a 60 percent premium over
A-Rod’s current market value. What price will it pay?
b.At the price computed in part a,what is the total market value of A-Rod
Corp.? (Use the number of A-Rod Corp. shares times price.)
c.At the price computed in part a,what is the P/E ratio Jeter Corp. is assigning
A-Rod Corp?
d.How many shares must Jeter Corp. issue to buy the A-Rod Corp. at the
total value computed in part b?(Keep in mind that Jeter Corp.’s price per
share is $30.)
e.Given the answer to part d,how many shares will Jeter Corp. have after the
merger?
f.Add together the total earnings of both corporations and divide by the
total shares computed in part e.What are the new postmerger earnings per
share?
g.Why has Jeter Corp.’s earnings per share gone down?
h.How can Jeter Corp. hope to overcome this dilution?
What factors would influence a U.S. business firm to go overseas?
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.
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