Calculate pound-denominated cost of capital for mia caruso

Assignment Help Financial Accounting

Reference no: EM132768911

Mia Caruso Enterprises, a U.S. manufacturer of children's toys, is considering a new project located in Great Britain. The expected free cash flows from the project are detailed below:

Year Free Cash Flow (£ millions)
0 -20
1 10
2 15
3 18

You know that the spot exchange rate is S = $1.8862/£. In addition, the risk-free interest rates on dollars and pounds are 5.4% and 4.6% respectively. Assume that these markets are internationally integrated and the uncertainty in the free cash flow is not correlated with uncertainty in the exchange rate. You have determined that the dollar WACC for these cash flows is 10.8%.

Problem a. Calculate the pound-denominated cost of capital for Mia Caruso Enterprises's project.

Problem b. Calculate (i) the pound present value of the project, and (ii) the dollar present value of the project?

Problem c. Mia Caruso Enterprises plans to send all profits back to the U.S. at the end of the project. Provide discussions on:

i. the exchange rate risk that Mia Caruso Enterprises is exposed to.
ii. how Mia Caruso Enterprises can adopt currency forwards and options contracts to hedge its exchange rate risk.
iii. how Mia Caruso Enterprises can use a cash-and-carry strategy to hedge its exchange rate risk (No calculation is required).
iv. advantages and disadvantages of the cash-and-carry strategy in comparison with the forward contracts.

Reference no: EM132768911

Questions Cloud

Determine the depreciation expense for cheery cobbler inc : Assume that Cheery follows ASPE. Determine the 2020 and 2021 depreciation expense assuming that the straight-line method is used.

Should the offer be rejected or accepted and why : Should the offer be rejected or accepted? Why? The full cost is $25 per dozen. Burns Sporting Goods Company plant has just enough excess capacity on the second

How do determine the machine second-year depreciation : The machine's useful life is estimated at 10 years, Determine the machine's second-year depreciation using the double-declining-balance method.

Examine its feasibility as a hypothetical project : The student will share their PICOT question and further explore and explain its key components, as well as examine its feasibility as a hypothetical project.

Calculate pound-denominated cost of capital for mia caruso : Mia Caruso Enterprises, a U.S. manufacturer of children's toys, Calculate the pound-denominated cost of capital for Mia Caruso Enterprises's project.

Write application of the selected nursing theory : Choose a nursing theory and research an article that includes a nursing theory and its utilization in nursing practice or nursing research.

What allocation to replace cafeteria with vending machines : What allocation to replace the cafeteria with vending machines will result in a monthly increase (decrease) in operating income of?

Complete an instalment note receivable schedule : Marin Inc., Complete an instalment note receivable schedule for the instalment note obtained in partial collection of accounts receivable.

Discuss the health implications of the health beliefs : Write a three-page paper about a specific health belief system that is common to a population. Discuss the health implications of the health beliefs.

User Account

All Pages