Chapter 3: Q3BP (page 221)

Orbital Communications has operating plants in over 100 countries. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 150,000 kronas in Norway worth $40,000. The funds drew 13 percent interest, and the krona increased 6 percent against the dollar. What is the value of the holdings, based on U.S. dollars, at year-end?
(Hint: Multiply $40,000 times 1.13 and then multiply the resulting value by 106 percent.)

Short Answer

Expert verified

The year-end value of the holding will be $479,176.50.

Step by step solution

Information provided in question

Value of 150,000 Kronas in 2010 = $40,000

Interest drawn by the funds = 13%

Percentage increase in value of Krona against dollars = 6%

Calculation of the value of the holdings

The value of the holdings at year-end will be $479,176.50.

$\begin{array}{rcl} S p o t r a t e & = & \frac{D o l l a r s}{K r o n a s} \\ = & \frac{40, 000}{150, 000} \\ = & 0.2667 \end{array}$

$\begin{array}{rcl} Y e a r - e n d r a t e & = & S p o t r a t e \times (1 + I n c r e a s e i n v a l u e o f k r o n a s) \\ = & 0.2667 \times (1 + 0.06) \\ = & 2.827 \end{array}$

$\begin{array}{rcl} D e p o s i t i n K r o n a a f t e r 1 y e a r & = & I n i t i a l d e p o s i t \times (1 + I n t e r e s t r a t e) \\ = & 150, 000 \times (1 + 0.13) \\ = & 169, 500 K r o n a \end{array}$

$\begin{array}{rcl} Y e a r - e n d v a l u e o f h o l d i n g & = & v a l u e o f d e p o s i t a t y e a r - e n d \times Y e a r - e n d r a t e \\ = & 169, 500 \times 2.827 \\ = & $ 479, 176.50 \end{array}$

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Short Answer

Step by step solution

Information provided in question

Calculation of the value of the holdings

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