Reference no: EM132804751

Questions - Give explanation with proper working notes for all the parts:

1. Mirchel and Morkel Inc. takess $500,000 and $500,000 in ¥ respectively for one year. The interest rates are:

The prevalent exchange rate is $1 = ¥120.

They entered in a currency swap under which it is agreed that morkel Inc will pay mirchel Inc @ 1% over the ¥ Loan interest rate which the later will have to pay as a result of the agreed currency swap whereas Mirchel Inc will reimburse interest to Morchel Inc only to the extent of 9%. Keeping the exchange rate invariant, quantify the opportunity gain or loss component of the ultimate outcome, resulting from the designed currency swap.

2. Babu Ltd. is a trading concern . It is all equity financed and has a paid-tip Capital of 10,00,000 (10 per share)

X Ltd. has hired Matt consultants to analyze the future earnings. The report of Swastika consultants states as follows:

(i) The earnings and dividend will grow at 25% for the next two years.

(ii) Earnings are likely to grow at the rate of 10% from 3rd year and onwards.

(iii) Further, if there is reduction in earnings growth, dividend payout ratio will increase to 50%.

The other data related to the company are as follows:

You may assume that the tax rate is 30% (not expected to change in future) and post-tax cost of capital is 15%.

By using the Dividend Valuation Model, calculate

(a) Expected Market Price per share

(b) P/E Ratio.