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ECS3350
Assessment -3 (Coursework)
2023-24
Question 1: Microsoft Corporation would like to borrow pounds, and BP wants to borrow dollars. Microsoft Corporation can borrow dollars at 7.6% and pounds at 10%, whereas BP can borrow dollars at 8% and pounds at 9%. Suppose Microsoft Corporation wants to borrow £4 million for three years, BP wants to borrow $5.2 million for three years, and the current ($/£) exchange rate is $1.30/£. (Please include currency symbols $, £ in your answer)
(a) What swap transaction would accomplish this objective? Assume the counterparties would exchange principal and interest payments with no rate adjustments. (3 marks)
(b) What savings per year are realized by Microsoft Corporation (in £) and BP (in $) with the swap? (2 marks)
(Max 200 words)
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(a) Comparative advantage, diagram, explanation (1+1+1 marks)
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(b) Savings of both companies (1+1)
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Question 2: Define and compare transaction exposure and economic exposure. (5 marks)
(Max 200 words)
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Definitions (1+1) Comparisons and managements (1.5 +1.5)
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Question 3: Tarhaz located in the UK, is evaluating the proposed purchase of new printing machines. The printers' base price is £65,000 and has a terminal value of £12,000. The company's cost of capital is 5%. The printers’ expected lifetime is 3 years. The net cash flows are as follows:
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Year 1 |
Year 2 |
Year 3 |
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Net cash flow |
£42,000 |
£44,000 |
£36,000 |
(Numbers should be rounded to 3 decimal places. Include currency symbols $, £ in your answer)
(a) Find the net present value of this project (NPV). Should it be accepted? (3 marks)
Suppose Tarhaz wishes to expand its operations in the US. The exchange rate at the time of investment is $1= £0.75.
(b) State the Relative purchasing power parity (PPP) formula. Use the PPP to find the exchange rate 1 year from now, 2 years from now and 3 years from now. The inflation rate in the U.S. (p$) is 5 percent and in the UK 4 percent (p£) (4 marks)
(c) What is the Adjusted Present Value (APV) capital budgeting framework? Why is the APV capital budgeting framework useful for analysing foreign capital expenditures? (3 marks)
(d) Find the NPV in dollars. Should Tarhaz invest in the US? (5 marks)
(Max 400 words)
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(a) Definition, calculation, and decision (1+1+1 marks)
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(b) Relative purchasing power parity (PPP) formula (1 mark) Calculation of exchange rates (1+1+1 marks)
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(c) APV definition formula (1 mark) Usefulness (2 marks)
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(d) Calculation, explanation, and decision (3+1+1 marks)
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