Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 5, Problem 39P
In the summer of 2008, at Heathrow Airport in London, Bestofthebest (BB), a private company, offered a lottery to win a Ferrari or 90,000 British pounds, equivalent at the time to about $180,000. Both the Ferrari and the money, in 100-pound notes, were on display. If the U.K. interest rate was 5% per year, and the dollar interest rate was 2% per year (EARs), how much did it cost the company in dollars each month to keep the cash on display? That is, what was the
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Mo.
Jeanette Johnson is going to Saudi Arabia next week for Spring break. She inquires about the rate of exchange between the US dollar and the Riyal (the currency of Saudi Arabia). She is then informed by a teller at Bank of America in San Francisco that the bank’s current bid rate is R/$ = 3.7505, while their offer rate is R/$ = 4.0000. Coincidentally, she meets Al Freddy, a friend of hers, who just arrived from Saudi Arabia and who would like to convert his Riyals into dollars at the same Bank.
Which of these two rates from Bank of America is applicable to Jeanette Johnson? [Remember: Jeanette who is going to Saudi Arabia has dollars that she wants to exchange against Riyals].
A. bid rate.
B. offer rate.
C. both the bid and offer rates
D. neither the bid nor the offer rate.
IBM purchased computer chips from NEC, a Japanese electronics concern, and was billed 1500 million payable in three months. Currently, the spot exchange rate is v110/S and the three-month forward rate is ¥100/S. The three-month money market interest rate is 12 percent per annum in the United States and 9 percent per annum in Japan. The management of IBM decided to use a money market hedge to deal with this yen account payable Explain the process of a money market hedge and compute the dollar cost of meeting the yen obligation b. Conduct a cash flow analysis of the money market hedge a.
On your post graduation celebratory trip you decide to travel to Munich, Germany, to Moscow, Russia. You leave Munich with 15,000 euros in your wallet. Wanting to exchange all of them for Russian rubles, you obtain the following quotes:
Spot rate on the dollar/euro cross rate: $1.3214/E
Spot rate on the ruble/dollar cross rate: Rbl30.96/$
What is the Russian ruble/euro cross rate?
How many rubles will you obtain for your euros?
Chapter 5 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 5.1 - Prob. 1CCCh. 5.1 - Prob. 2CCCh. 5.2 - How can you compute the outstanding balance on a...Ch. 5.2 - What is an amortizing loan?Ch. 5.3 - What is the difference between a nominal and real...Ch. 5.3 - How do investors expectations of future short-term...Ch. 5.4 - Prob. 1CCCh. 5.4 - How do taxes affect the interest earned on an...Ch. 5.5 - What is the opportunity cost of capital?Ch. 5.5 - Why do different interest rates exist, even in a...
Ch. 5 - Your bank is offering you an account that will pay...Ch. 5 - Which do you prefer: a bank account that pays 5%...Ch. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - You are considering moving your money to a new...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - You can earn 50 in interest on a 1000 deposit for...Ch. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - You have just sold your house for 1,000,000 in...Ch. 5 - Prob. 16PCh. 5 - Your mortgage has 25 years left, and has an APR of...Ch. 5 - Prob. 18PCh. 5 - Prob. 19PCh. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - The mortgage on your house is five years old. It...Ch. 5 - You have credit card debt of 25,000 that has an...Ch. 5 - Prob. 25PCh. 5 - Prob. 26PCh. 5 - Prob. 27PCh. 5 - Prob. 28PCh. 5 - Suppose the term structure of risk-free interest...Ch. 5 - Prob. 30PCh. 5 - Prob. 31PCh. 5 - Suppose the current one-year interest rate is 6%....Ch. 5 - Figure 5.4 shows that Johnson and Johnsons...Ch. 5 - Prob. 34PCh. 5 - Prob. 35PCh. 5 - Prob. 36PCh. 5 - Your best friend consults you for investment...Ch. 5 - Suppose you have outstanding debt with an 8%...Ch. 5 - In the summer of 2008, at Heathrow Airport in...Ch. 5 - Your firm is considering the purchase of a new...Ch. 5 - Prob. 41P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You go to a bank and are given these quotes: You can buy a euro for 17 pesos. The bank will pay you 16 pesos for a euro. You can buy a U.S. dollar for 0.69 euros. The bank will pay you 0.61 euros for a U.S. dollar. You can buy a U.S. dollar for 14 pesos. The bank will pay you 12 pesos for a U.S. dollar. You have $5,000. Compute the profit that you would earn using triangular arbitrage. Enter "0", if you incur a loss. Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forwardYou go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for 0.85 euros. The bank will pay you 0.75 euros for a U.S. dollar. You can buy a U.S. dollar for 9 pesos. The bank will pay you 8 pesos for a U.S. dollar. Compute the profit that you would earn using triangular arbitrage.arrow_forwardYou go to a bank and are given these quotes: You can buy a euro for 11 pesos. The bank will pay you 10 pesos for a euro. You can buy a U.S. dollar for 0.81 euros. The bank will pay you 0.76 euros for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The bank will pay you 9 pesos for a U.S. dollar. You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the order of the transactions that you would execute. If you cannot earn a profit from triangular arbitrage, explain why. I. Yes, you can generate a profit by converting dollars to euros, and then euros to pesos, and then pesos to dollars. II. Yes, you can generate a profit by converting dollars to pesos, and then pesos to euros, and then euros to dollars. II. No, triangular arbitrage is not possible because the quoted cross exchange rates do not differ from the rates that should exist. -Select- ✔ Compute the profit that you would earn using triangular arbitrage. Enter "0", if you incur a loss. Do not…arrow_forward
- Last year, your company sold electronic products to Brazil. You are expecting to receive Real 850,000 in 6 months. The following quotations are provided by a currency dealer: In $ Real 1 m. forward 3 m. forward per $ 2.3810 2.3753 0.4200 0.4210 0.4350 2.2989 6 m. forward 0.4115 2.4301 If you are completely confident that the spot rate in 6 months will be 0.4228, do you need to take a short or long position in Real forward contract?arrow_forwardAssume that a UK family visits Spain every summer. Last year, the hotel room where they stayed was priced at £120 per night, and the price is the same this year. The exchange rate was 1.1 £/€ last year, and it is 0.98 £/€ this year. This means they will pay (£14.40 less/£14.40 more/£8.10 more/£8.10 less) per night this year than was paid last year. The pound/euro exchange rate is essentially the price of a euro in terms of pounds. When this price falls, the euro is said to depreciate against the pound. Thus, from your analysis, you can conclude that when the euro depreciates against the pound, European goods and services become (less/more) expensive for the British. DeutschAuto is a German automaker that pays for most of its production costs in euros. Assume that in 2015, DeutschAuto's cost of producing a car was €26,500, and the company sold the car in pounds for £42,000. Assume pound–euro exchange rate rose from 1 £/€ in 2015 to 1.57 £/€ in 2016. DeutschAuto's euro cost of…arrow_forwardIBM purchased computer chips from NEC, a Japanese electronics concern, and was billed ¥210 million payable in three months. Currently, the spot USD/JPY rate is 108 and the three-month forward rate is 103. The three-month money market interest rate is 4.6 percent per annum in the U.S. and 2.4 percent per annum in Japan. The management of IBM decided to use the money market hedge to deal with this yen account payable. Calculate today's dollar cost of meeting this yen obligation. (USD, no cents)arrow_forward
- Please teach me how to solve this, thanks! ABC would like to hire two loan collectors to speed up its collection process. Each of the loan collectors will be given total annual benefits of P150,000 per year. The entity earns P30,000,000 in sales, 10% of which are cash. The entity has a 365-day year and a minimum required rate of return of 10%. The current average age of receivables is 70 days but with the loan collectors, it is forecasted to decrease by 30 days. How much is the net benefit or (cost) of this option?arrow_forwardOne year ago, JK Mfg. deposited $20,500 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today. How much will be available when it is ready to buy the equipment, assuming the account pays 3.5 interest?arrow_forwardThe treasurer of a major U.S. firm has $31276878 to invest for three months. The annual interest rate in the United States is 0.35% per month. The interest rate in Great Britain is 0.59% per month. The spot exchange rate is £0.72, and the three-month forward rate is £0.74. Ignoring transaction costs, what would be the NPV of investing in Great Britain as opposed to invest in the U.S.? NOTE: Enter the number rounding to four decimal placesarrow_forward
- A bridge was damaged by an earthquake. Asclepius Inc. was contracted by the government to repair the bridge. Asclepius Inc. needs P1,650,000 for 30 days to pay wages and buy supplies. A bank lends them the funds at an 8% rate. How much cash is needed to repay the bank after 30 days? Use a 360-day уear:arrow_forwardA local bank is running the following advertisement in the newspaper: "For just $4,000 we will pay you $400 forever!" The fine print in the ad says that for a $4,000 deposit, the bank will pay $400 every year in perpetuity, starting one year after the deposit is made. What interest rate is the bank advertising (what is the rate of return of this investment)? The interest rate the bank is advertising is %. (Round to the nearest integer.)arrow_forwardNext winter, 200 students are going to Qatar to see the World Cup. You will each have a suitcase whose contents are worth £100 to you. 10% of suitcases from Runnymede airport go missing. Horton Insurance is offering insurance with a premium of £11 to all students such that if their bag does not arrive in Qatar, they will be compensated with £100 in cash at the airport. Given what you know about insurance, what do you think about the Economic feasibility of Horton Insurance’s plans?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
What Does ROI (Return On Investment) Really Mean?; Author: REtipster;https://www.youtube.com/watch?v=Z6ThJvNr1Dw;License: Standard Youtube License