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Assignment3

1. Decko Co. is a U.S. firm with a Chinese subsidiary that produces smartphones in China and sells them in Japan. This subsidiary pays its wages and its rent in Chinese yuan, which is stable relative to the dollar. The smartphones sold to Japan are denominated in Japanese yen. Assume that Decko Co. expects that the Chinese yuan will continue to stay stable against the dollar. The subsidiary’s main goal is to generate profits for itself and reinvest the profits. It does not plan to remit any funds to Decko, the U.S. parent.  a. Assume that the Japanese yen strengthens against the U.S. dollar over time. How would this be expected to affect the profits earned by the Chinese subsidiary?  b. If Decko Co. had established its subsidiary in Tokyo, Japan, instead of in China, would the subsidiary’s profits be more exposed or less exposed to exchange rate risk?  c. Why do you think that Decko Co. established the subsidiary in China instead of Japan? Assume no major country risk barriers.

 2. A project in Malaysia costs $4 million. Over the next three years, the project will generate total operating cash flows of $ 3.5 million, measured in today’s dollars using a required rate of return of 14 percent. What is the break-even salvage value of this project?

 3. Brower, Inc., just constructed a manufacturing plant in Ghana. The construction cost 9 billion Ghanaian cedi. Brower intends to leave the plant open for three years. During the three years of operation, cedi cash flows are expected to be 3 billion cedi, 3 billion cedi, and 2 billion cedi, respectively. Operating cash flows will begin one year from today and are remitted back to the parent at the end of each year. At the end of the third year, Brower expects to sell the plant for 5 billion cedi. Brower has a required rate of return of 17 percent. It currently takes 8,700 cedi to buy 1 U.S. dollar, and the cedi is expected to depreciate by 5 percent per year. a. Determine the NPV for this project. Should Brower build the plant?  b. How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8,700 cedi per U.S. dollar over the course of the three years? Should Brower construct the plant then?

 4. Greenbay Corp. recently considered divesting its Russian subsidiary and determined that the divestiture was not feasible. The required rate of return on this subsidiary was 15 percent. Recently, Greenbay’s required return on that subsidiary increased to 24 percent. If the sale price of the subsidiary has not changed, explain why the divestiture may now be feasible.

 5. Redwood Co., a U.S. firm, is considering the purchase of a target company based in Mexico. The net cash flow to be generated by this target firm are expected to be 400 million pesos at the end of one year. The existing spot one year rate is $0.15, while the expected spot rate in one year is $0.12. All cash flows will be remitted to the parent at the end of one year. In addition, Redwood hopes to sell the company for 800 million pesos after tax at the end of one year. The target has 10 million shares outstanding. If Redwood purchases this target, it would require a 20 percent return. The maximum value that Redwood should pay for this target company today is _____pesos per share. Show your work.

 6. An MNC has total assets of $100 million and debt of $20 million. The firm’s before-tax cost of debt is 12 percent, and its cost of financing with equity is 15 percent. The MNC has a corporate tax rate of 40 percent. What is this firm’s cost of capital?

 7. Wiley, Inc., an MNC, has a beta of 1.3. The U.S. stock market is expected to generate an annual return of 11 percent. Currently, Treasury bonds yield 2 percent. Based on this information, what is Wiley’s estimated cost of equity?