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On February 26, 2015, an American Company

• Date Submitted: 03/30/2016 09:51 AM
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On February 26, 2015, an American company

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1. On February 26, 2015, an American company, Company A, sold an euro-denominated eight-year bond at a fixed interest rate of 1%. In comparison, a similarly rated company, Company B, sold a bond with the same maturity in the U.S. with a coupon of 2.5%. The exchange rate on February 26, 2015 was \$1.1199/€. Assume that the International Fisher Effect holds true. What will be the total expected foreign exchange gain or loss for both the interest payment and the value of the bond (in percentage) for Company A each year in the next eight years?
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(Keep two decimals; Do include the “-” if your answer is a loss.)

2. At the end of 2014, a Eurozone firm considers an investment project in Switzerland. The firm’s cost of capital is 10% and the firm uses this as its discount rate for the proposed investment. The initial investment and free cash flows for subsequent years (a horizon of five years) are presented in the table below.

On January 15, 2015, the Swiss National Bank removed the exchange rate cap and the exchange rate changed fromSfr1.20/€ toSfr1.00/€. The exchange rate is expected to stay at the new level for the investment horizon. The exchange rate change does not affect cash flows in Swiss franc but does affect the conversion from Swiss franc cash flows to euro cash flows. Which of the following statement addresses correctly the effect of the exchange rate change on the firm’s capital budgeting?

a. NPV is positive both before and after the exchange rate change.

b. NPV is negative both before and after the exchange rate change.

c. NPV is positive before the exchange rate change...