Capella University Finance Exchange Rate Question

1. Suppose that the exchange rate is .60 dollars per Swiss franc. If the franc appreciates 10% against the dollar, how many francs would a dollar buy tomorrow?

2. Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen equals .0086 dollar. In Japan, 90-day risk free securities yield 4.6%. What is the yield on 90-day risk free securities in the United States.

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3. Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a 50-million-peso loan from a Mexcio City bank last month to fund the expansion of your Monterrey, Mexico, plant. The exchange rate was 10 U.S. cents per peso when you took out the loan, but since then the exchange rate has dropped to 9 U.S. cents per peso. Has Wruck Enterprises made a gain or a loss due to the exchange rate change, and how much? Note that your shareholders live in the United States.

4. In 1983, the Japense yen-U.S. dollar exchange rate (USD/JPY) was 245 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $8000. Suppose that now the exchange rate is 80 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all price changes are due to exchange rate changes. What would the dollar price of the car be now, assuming the car’s price changes only with exchange rates?

5. Dunbar Corporation can purchase an asset for $30,000; the asset will be worthless after 14 years. Alternatively, it could lease the asset for 14 years with an annual lease payment of $3,653 paid at the end of each year. The firm’s cost of debt is 9%. The IRS classifies the lease as a non-tax-oriented lease. What is the net advantage to leasing?

6. Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply.

• The machinery falls into the MACRS 3 -year class.
• Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.
• The firm’s tax rate is 25%.
• The loan would have an interest rate of 15%. It would be nonamortizing, with only interest paid at the end of each year for four years and the principal repaid at Year 4.
• The lease terms call for $400,000 payments at the end of each of the next 4 years.
• Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4^th

1. What is the cost of owning?
2. What is the cost of leasing?
3. What is the NAL of the lease?