Solved by verified expert :FNCE 461 International FinanceHomework 31. An American investor decides to buy 10,000 shares of British Airways (BA) on January 5 andsell them on February 5. On January 5, the share quote is (£) 3.50–3.52 and the exchange rate £:$is 1.5000–1.5040. On February 5, the share quotes is (£) 3.81–3.83 and the exchange rate £:$ is1.4500–1.4540. The shares are listed in London. There is a U.K. broker commission of 0.2% of thetransaction value (on the purchase and on the sale) and a 0.5% U.K. securities transaction tax onpurchase (but not on the sale); this tax cannot be recovered. Foreign exchange rates are the net ofcommissions and taxes.a. What is your dollar rate of return on the operation?b. Would the rate of return be the same for a British investor using the British pound as a referencecurrency?2. Four companies belong to a group and are listed on a stock exchange. The cross-holdings ofthese companies are as follows.• Company A owns 30% of Company B and 10% of Company C.• Company B owns 10% of Company C.• Company C owns 10% of Company A, 10% of Company B, and 25% of Company D.• Company D owns 10% of company B.Each company has a market capitalization of $50 billion. You wish to adjust for cross-holding toreflect the weights of these companies in a market-capitalization weighted index.a. What adjustments would you make in the market capitalization of each company to reflect thefree float?b. What would be the total adjusted market capitalization of the four companies?3. Gamma-Omega is a Spanish firm listed in Spain, with an American Depository Receipt (ADR)traded on the NYSE. The stock prices are 30 euros in Spain, and 45 dollars in New York; the exchangerate is 1.5 dollars per euro. Suddenly, an economic problem in Euro area leads to a depreciation of theeuro and a drop of the Spanish stock market. The new exchange rate is 1.4 dollars per euro, and thenew stock price of Gamma-Omega is 25 euros.a. What should the price quoted in New York be?b. Actually the stock price in New York is 33 dollars. Should you buy or sell the stock, and why?4. You consider an industry with numerous very small firms and five large firms. Their marketshares are as follows:Company Market Share, %A 45B 20C 10D 5E 51a. What is the market concentration measured by Herfindahl index (quantitatively and qualitatively)and 2 firm concentration ratio?b. Suppose companies A and B merge. Characterize the post-merger concentration as in questiona.c. Consider now that the merger is between companies A and D. Characterize the concentrationas in question a.d. Suppose company A split up into two companies with shares 25 and 20. Characterize theconcentration as in question a.5. A U.S. investor considers an investment into a Japanese firm. The firm’s ROA is 3%, assetvalue is JPY 5 million and debt value is JPY 3 million. The spot and forward (1 year) exchange ratesUSD:JPY are 115 and 125.a. Calculate the ROE of the firm.b. Determine total return on investment into equity if the position is hedged.c. Suppose after investment had been made, the Central Bank of Japan announces unexpectedcontractionary monetary policy measures. How the return on the hedged investment will be affected?d. Compare the effect of the monetary measures as in c) with an unhedged position.6. A company can generate an return on equity (ROE) of 12% and has an earnings retention ratioof 50%. Next year’s earnings are projected at $100 million. If the required rate of return for thecompany is 10%, what is the company’s “no-growth” P/E component, franchise factor, growth factor,and intrinsic P/E ratio?7. Consider two companies based in a country with an inflation rate of 2%. There is no real growthin earnings. The real rate of return required by global investors for this type of stock investment is5%.a. Assume that the Company A can only pass 60% of inflation through its earnings. What shouldbe its P/E using prospective earnings?b. Assume that the Company B can pass the full inflation through its earnings. What should beits P/E using prospective earnings?8. An European investor forecasts the net cash flows of a U.S company to be $1 million, $0.8million, and $1.2 million at the end of the first, second, and third years respectively. At the end ofthe third year the company has a terminal value of $12 million. The required rate of return in eurois 10%. The nominal interest rates in Europe and the USA are 3% and 1% correspondingly. Assumethat the interest rate parity holds.a. Calculate the value of the company in USD.b. Suppose that the Federal Reserve Board (unexpectedly) announces contractionary monetarypolicy program. How does this announcement affect the value of the company?9. Assume that a company has net income of $80 million. The interest payments are 25% of thenet income. The operating margin is 20%. The equity and debt capital are $400 and $300 millionsrespectively. Ignore the taxes.a. Calculate asset turnover ratio.b. Calculate ROE.c. If the required return on equity is 20%, what is the present value of growth opportunities in thefranchise value model?10. A French institutional investor wishes to buy 1,000 shares of General Motors. A U.S. brokerquotes 45–45 1?4, with a commission of 0.20% of the transaction value. A bank quotes the €:$ rateat 1.1000–1.1100. What would be the total cost in euros?
Expert answer:FNCE 461 International Finance Homework 3 2015
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