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How can korp united reduce the risk associated

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Reference no: EM132596557

Korp United is an Australian company with 500,000 shares outstanding. The share price is $20. Korp United is considering paying a cash dividend of SI per share. Alternatively, the company can distribute the same amount to the shareholders through share repurchase.

Another concern of the management is exchange rats risk. The company's income is mainly derived from export of its product to Japan. The management is concerned about the effect of currency fluctuations on cash flows as the Australian dollar is expected to drastically appreciate against As Japanese Yen at the end of the year.
The spot exchange rate is AS0.015/4 (0.015 Japanese Yen equals I Australian Dollar). A one-year forward contract can be arranged at a forward rate of AS0.014/4. In addition, a call option with a strike price of AS0.015fli and a put option with a strike price of A$0.014/4 is available.

Required:

(a) Assuming a perfect capital market, would an investor prefer stock repurchase or cash dividend?

(b) Discuss whether investors would prefer share repurchase or cash dividends after taking into account the effect of tax. Assume the cash dividends will be paid out a profits which have been taxed at the full Australian corporate tax rate of 30%.

(c) How can Korp United reduce the risk associated with currency fluctuations using options or forward contracts?

(d) Suppose As Australian dollar did not appreciate against yen as expected. Instead the rate is AS0.018/4 in October. In hindsight, should the company have hedged using options or forward contracts?

(e) Discuss one method the company can use to reduce exchange rate risk without the use of options, forwards or other derivatives.

Reference no: EM132596557

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