26) A Chicago-based company plans to make a $2 million euro investment in Berlin

Question

26) A Chicago-based company plans to make a $2 million euro investment in Berlin, Germany. Cost of capital for this project is 15%. The company will make specialized tubes for solar panels. The 3-year project is expected to generate the following set of cash flows:

Year

Net CF in €

0

-2,000,000

1

700,000

2

800,000

3

1,500,000

The spot exchange rate for the euro currency is $1.25. The term structure of interest rates for both the US Treasury bonds and German government bonds (both are considered default risk free) are as follows:

US

German

Term

Yield

Yield

1

1.29%

2.50%

2

1.57%

2.54%

3

1.79%

2.86%

Using the cash flow conversion approach, calculate the NPV of this international project.

B) $188,560.97

C) $197,051.85

D) None of the above

27) INTERNATIONAL FINANCE. Suppose you wish to invest $50,000 today in German securities earning 5% per year. What is your investment value 3 years from today - in U.S. dollars - if, if at that time the direct quote for the euro is $1.35? Assume the current spot exchange rate is $1.30.

B) $44,524.04

C) $52,500.00

D) $60,107.45

E) None of the above

28) CORPORATE VALUATION. Tae-Yeong, Inc. forecasts that free cash flow for next year (FCF1) will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4%. If the weighted average cost of capital is 14%, what is the firm's value of operations today, in millions?

B) $167

C) $175

D) $184

E) $193

      F) None of the above

30) Based on the published data, one can determine that the SUM of the company's net operating profit after taxes (NOPAT) and depreciation charges for the period is called:

B) Operating cash flow, and is equal to $12.11 billion

C) Free cash flow, and is equal to $8.57 billion

D) Operating cash flow, and is equal to $8.68 billion

E) Not enough information to determine

Year

Net CF in €

0

-2,000,000

1

700,000

2

800,000

3

1,500,000

Explanation / Answer

Year Net CF in € conversion Net CF in USD PV PVCF 0 -2,000,000 1.25        (1,600,000) 1 (1,600,000) 1 700,000          1.2649              553,389 0.86956         481,205 2 800,000          1.2770              626,462 0.75614         473,693 3 1,500,000          1.2904          1,162,398 0.65751         764,288 NPV         119,186

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