Reference no: EM13835639

1. At today's spot exchange rates 1 U.S. dollar can be exchanged for 9 Mexican pesos or for 111.23 Japanese yen. You have pesos that you would like to exchange for yen. What is the cross rate between the yen and the peso; that is, how many yen would you receive for every peso exchanged?

2. The nominal yield on 6-month T-bills is 7%, while default free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate parity holds, what is the 6-month forward exchange rate?

3. A computer costs $500 in the United States. The same set costs 550 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

4. Suppose the exchange rate between U.S. dollars and the Swiss francs is SFr 1.6 = $1 and the exchange rate between the dollar and the British pound is £1 = $1.50. What then is the cross-rate of francs and pounds?

5. In 1983 the Japanese yen-U.S. dollar exchange rate was 245 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $8,000. 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?

6. Reynolds Construction needs a piece of equipment that $200. Reynolds either can lease the equipment or borrow $200 from a local bank and buy the equipment. If the equipment is leased, the lease would not have to be capitalized. Reynolds' balance sheet prior to the acquisition of the equipment is as flows:

Current Assets $300 Debt $400
Net fixed assets $500 Equity 400
Total assets $800 Total Claims $800

a. 1. What is Reynolds current debt ratio?

2. What would be the company's debt ratio if it purchased the equipment?

3 What would be the debt ratio if the equipment were leased?

b. Would the company's financial risk be different under the leasing and purchasing alternatives?

7. Consider the data in problem 19-1. Assume that Reynold's tax rate is 40% and that the equipment's depreciation would be $100.00 per year. If the company leased the asset on a 2 year lease, the payment would be $110.00 at the beginning of each year. If Reynold's borrowed and bought, the bank would charge 10% interest on the loan. In either case, the equipment is worth nothing after 2 years and will be discarded. Should Reynolds lease or buy the equipment?

8. 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:

1. The machinery falls into the MACRS 3-year class.

2. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.

3. The firm's tax rate is 40%.

4. The loan would have an interest rate of 15%. It would be non-amortizing, with only interest paid at the end of each year for four years and the principal repaid at year 4.

5.) The lease terms call for $400,000 payments at the end of each of the next 4 years.

9. 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 4th year. What is the NAL of the lease?