Johnson of NJ is considering selling its luxury boats to a German company. Johns

Question

Johnson of NJ is considering selling its luxury boats to a German company. Johnson sells a boat for $98,000 which has a total cost of $81,000 per boat.   The German company can sell 15 boats per month in Europe which is priced in euros. The German company will pay Johnson 75,384 euros for each boat. The German company orders 15 boats and will pay in 90 days. The current spot exchange rate today is $1.30 per euro.

    1. What is Johnsons projected gains and losses from this proposed arrangement at the current exchange rate of $1.30 per euro. What happens if the exchange rate changes to $1.37 per euro? At what exchange rate will the company breakeven?

    2. What happens to the forward exchange rate if German interest rate is 7% and US interest rate is 2%. Does this affect the profitability of Johnson? By how much?

    3. Should Johnson pursue the international sales.? Why or why not?

2. Panam airlines hired you as a consultant to value its equity because it plans to go public soon. The company will maintain its 30% debt and that at this capital structure, debt holders will demand a return of 6% and stock holders will require 11%. Next years operating cash flow will be $68 million and that investment expenditures will be $30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4% a year. The companys tax rate is 40%

a. What is the total value of Panam airlines?

b. What is the value of the companys equity?

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