Question 1

The Law of One Price asserts that we will obtain the same valuation of a project whether
(a)we use the domestic cost of capital of the domestic currency equivalent cash flows at the forward exchange rates or
(b)we use the corresponding foreign cost of capital and then convert the present value (PV)of the foreign currency value of the cash flows at the spot rate.

Accepted Answer

The Law of One Price states that in an efficient market, identical resources will have the same price in different locations. This means that if we use the domestic cost of capital to value a project in the domestic currency and then convert the cash flows at the forward exchange rate, we will get the same valuation as if we used the corresponding foreign cost of capital and then converted the PV of the foreign currency cash flows at the spot rate. Therefore, the statement is true.

Question 2

If a foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.

Accepted Answer

Managers and shareholders of a domestic corporation need to determine the home currency value of foreign currency cash flows for a foreign project they own. This helps them understand the financial impact of the foreign project on their overall financial statements.

Question 3

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rS1U1B1$S1U1B0, is 5.35% and the risk-free interest rate on pounds, rS1U1B1£S1U1B0, is 4.80%.
-What is a 'currency timeline'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Use the information for the question(s)below.
The current...

Question 4

A(n)________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

Accepted Answer

The description given in the question corresponds to an internationally integrated capital market, which allows for the free flow of funds and securities across borders without any restrictions or limitations. The other options listed do not fully capture the characteristics mentioned in the question.

Question 5

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rS1U1B1$S1U1B0, is 5.35% and the risk-free interest rate on pounds, rS1U1B1£S1U1B0, is 4.80%.
-What is 'cash-and-carry'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Use the information for the question(s)below.
The current...

Question 6

Consider the following equation: The term in this equation is

Accepted Answer

The equation provided includes a term for the risk-free rate in the foreign investor's country. Therefore, the appropriate cost of capital from the standpoint of a foreign investor is the best choice.

Question 7

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rS1U1B1$S1U1B0, is 5.35% and the risk-free interest rate on pounds, rS1U1B1£S1U1B0, is 4.80%.
-What is 'covered interest parity'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Use the information for the question(s)below.
The current...

Question 8

Which of the following statements regarding international projects is FALSE?

Accepted Answer

The statement that the project will most likely generate home currency cash flows is false because, in international projects, cash flows are often generated in the foreign currency of the country where the project is located, and the firm must consider the foreign currency value of these cash flows due to exchange rate risk and its impact on the project's value.

Question 9

What are internationally integrated capital markets?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of What are internationally integrated capital markets?
_____________________________________________________________________________________________
_____________________________________________________________________________________________...

Question 10

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rS1U1B1$S1U1B0, is 5.35% and the risk-free interest rate on pounds, rS1U1B1£S1U1B0, is 4.80%.
-What is 'floating rate'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Use the information for the question(s)below.
The current...

Question 11

Consider the following equation: The term S in this equation is

Accepted Answer

S in this equation refers to the current spot exchange rate.

Question 12

Use the information for the question(s)below.
The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rS1U1B1$S1U1B0, is 5.35% and the risk-free interest rate on pounds, rS1U1B1£S1U1B0, is 4.80%.
-What is a 'currency forward contract'?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

The answer of Use the information for the question(s)below.
The current...

Question 13

An Australian firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100 000 euros after one year. If the one-year forward exchange rate is $1.50/euro and the dollar cost of capital is 8%, what is the present value (PV)of the project cash flows?

Accepted Answer

1. Convert the euro cash flows into dollars:
100,000 euros * $1.50/euro = $150,000
2. Calculate the present value using the dollar cost of capital:
PV = $150,000/(1+0.08) = $138,888.89
Therefore, the PV of the project cash flows is $138,888.89, which is closest to option B, $138,889.

Question 14

With internationally integrated capital markets, the value of an investment depends on the currency used in the analysis.

Accepted Answer

The value of an investment is determined by its intrinsic value, which is based on the underlying economic fundamentals and future cash flows, not the currency used in the analysis. Currency considerations might affect the translation of that value into different currencies for investors, but they do not change the intrinsic value of the investment itself.

Question 15

An Australian firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 100 000 euros after one year. If the one-year forward exchange rate is $1.35/euro and the dollar cost of capital is 10%, what is the present value (PV)of the project cash flows?

Accepted Answer

First, we need to convert the cash flow from euros to dollars using the forward exchange rate: 100,000 euros * $1.35/euro = $135,000. Then we can calculate the present value using the formula PV = CF / (1 + r), where CF is the cash flow and r is the cost of capital. PV = $135,000 / (1 + 0.10) = $122,727.

Question 16

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, rS1U1B1$S1U1B0, is 5.35% and the risk-free interest rate on pounds, rS1U1B1£S1U1B0, is 4.80%. -Using the covered interest parity condition, the calculated three-year forward rate F₃is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
The current...

Question 17

Consider the following equation: The term in this equation is

Accepted Answer

The term "appropriate cost of capital from the standpoint of an Australian investor" suggests that the equation is designed to reflect the cost of capital specifically for investments or financial decisions made within Australia, from the perspective of an investor based in Australia. This would include considerations unique to the Australian financial environment, such as local interest rates, economic conditions, and regulatory factors.

Question 18

Consider the following equation: The term F in this equation is

Accepted Answer

The term "F" in the equation represents the forward exchange rate, which is the exchange rate agreed upon today for a future date.

Question 19

An Australian firm is planning to make an investment in Europe. The firm estimates that the project will generate cash flows of 200 000 euros after one year. If the one-year forward exchange rate is $1.40/euro and the dollar cost of capital is 9%, what is the present value (PV)of the project cash flows?

Accepted Answer

PV = CF / (1 + r)
PV = 200,000 / (1 + 0.09)
PV = 183,486.24 euros
PV in dollars = 183,486.24 euros x $1.40/euro
PV in dollars = $256,881.74
Therefore, the present value of the project cash flows is $256,881, which is closest to option B ($256,881).

Question 20

The present value (PV)of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:

Accepted Answer

The correct answer is A because the present value of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to $8 950 495.

Quiz 22: International Corporate Finance

If a foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -What is a 'currency timeline'? _ _

A(n) ________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -What is 'cash-and-carry'? _ _

Consider the following equation: The term in this equation is

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -What is 'covered interest parity'? _ _

Which of the following statements regarding international projects is FALSE?

What are internationally integrated capital markets? _ _

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -What is 'floating rate'? _ _

Consider the following equation: The term S in this equation is

Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r_$, is 5.35% and the risk-free interest rate on pounds, r_£, is 4.80%. -What is a 'currency forward contract'? _ _

With internationally integrated capital markets, the value of an investment depends on the currency used in the analysis.

Consider the following equation: The term in this equation is

Consider the following equation: The term F in this equation is

The present value (PV) of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:

Quiz 22: International Corporate Finance

If a foreign project is owned by a domestic corporation, managers and shareholders need to determine the home currency value of the foreign currency cash flows.

A(n) ________ market is one where an investor can exchange any currency in any amount at the spot rate or forward rate and is free to purchase or sell any security in any amount in any country at their current market prices.

Consider the following equation: The term in this equation is

Which of the following statements regarding international projects is FALSE?

What are internationally integrated capital markets? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Consider the following equation: The term S in this equation is

With internationally integrated capital markets, the value of an investment depends on the currency used in the analysis.

Consider the following equation: The term in this equation is

Consider the following equation: The term F in this equation is

The present value (PV) of the £5 million cash inflow computed by first discounting the £s and then converting into dollars is closest to:

What are internationally integrated capital markets? _ _