Here are questions and answers. Please show me the calculation of each question.

Question

Here are questions and answers. Please show me the calculation of each question. Thank you so much.

1. The Australian mining company BHP Billiton trades in the US on the NYSE as an ADR with the symbol BHP. The price of an ordinary share on the Sydney stock exchange is AUD 95, and the price of the ADR is US$142.50. The current exchange rate is US$0.75/AUD.   You have $50,000 to invest. One ADR buys two ordinary BHP shares on the Sydney exchange.

Six months from today the local currency price is AUD 107, and the exchange rate is US$0.65/AUD.

a.)   What is your rate of return measured in US dollars? Answer: -2.386%.

b.)   How much of your return is due to the change in the stock price and how much is due to the change in the currency?

Answer: % BHP Sydney = +12.6316%.

               % AUD = -13.3333%.

Check = [1.126316 x 0.86666] -1 = -2.386%.

2. You are an INR-based investor, who also buys GM stock at $35, when the exchange rate is INR65 / USD. Six months later the exchange rate is INR67 / USD.

At what price would you have to sell the GM stock to realize an INR return of 15% for the 6-month period?Answer: $39.05.

3.  When companies borrow in global debt markets, the cost of debt capital includes the effect of changes in exchange rates. General Electric needs to borrow the equivalent of $100 million for one year. GE decides to borrow yen, unhedged, in the Tokyo market. The coupon rate is 2%, and the exchange rate on the issue date is ¥105/$. The exchange rate is ¥110/$ on the day the debt obligation matures.

  What is GE’s before-tax dollar cost of debt capital?  Answer: -2.64%.

Explanation / Answer

1) Current cost of ADR = $142.50

6 months from now

stock price = AUD 107

ADR price (in AUD) = AUD 107 per share x 2 shares per ADR = AUD 214

ADR Price (in $) = AUD 214 x $0.65/ AUD = $139.10

Rate of return = (139.10 - 142.50) / 142.50 = (-)0.0238596 or (-)2.386%

2) We need the purchase price in INR first as INR return in given.

Purchase price in INR = $35 x INR 65 / $ = INR 2275

Rate of return = (Sale Price - Purchase Price) / Purchase Price

Or, 0.15 = (Sale Price - INR 2275)/ INR 2275

Or, Sale Price = INR 2616.25

Now, Sale Price in USD = INR 2616.25 / INR 67/ $ = $39.05

3) For dollar cost of debt, you need to convert the total amount repayable after one year to the dollar amount.

Amount borrowed (in $) = $100 million

Amount borrowed (in Yen) = $100 million x ¥105/ $ = ¥10,500 million

Interest @ 2% for one year = ¥10,500 million x 2% = ¥210 million

Amount to be paid after one year (in Yen) = ¥10,710 million

Amount to be paid after one year (in $) = ¥10,710 million / ¥110/ $ = $97.363636 million

Dollar Cost of debt = ($97.363636 million - $100 million) / $100 million = (-)0.0263636 or (-)2.64%

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