What is the optimal form of financing

Reference no: EM133432528

Question 1: Kito Co. is an American company that imports supplies from Australia an equivalent of 12 million USD in AUD per year. Meanwhile all sells are invoiced in U.S. dollars. They anticipate revenues of $20 million per year, being half of the revenue from sales to customers in Australia. The current spot rate is 1 USD/AUD, but it is likely that it will depreciate by 20%.

Kito Co. is planning a new project that will expand its sales. Kito can finance the project with a five-year loan. The principal will be paid at the end of the term. The loan corresponds to 10 million USD or its equivalent in AUD at an annual interest rate of 15% in the US or 9% if the loan is in AUD. So if Kito wants to use financing that will reduce its exposure to exchange rate risk, what is the optimal form of financing: (1) borrowing USD, (2) borrowing AUD, or (3) borrowing one-half of the funds from each of these sources?. What is the cash flow sensitivity of the optimal decision?

	Scenario 1	Scenario 2
USD/A$	1	0.8
Sales
(1) U.S.	10,000,000	10,000,000
(2) AUSTRALIA	10,000,000	10,000,000
(3) Total	20,000,000	20,000,000
Cost of materials:
(4)AUSTRALIA
(5) Total
Interest
(6) U.S.:
(7) AUSTRALIA
(8) Total
(9) Net cash flow
Percentual change of USD/AUD
Percentual change of NCF
NCF Sensitivity

Reference no: EM133432528

Questions Cloud

Define the term hereditament : Define the term hereditament and What deed clause would be included to address natural resources that exist under the surface of the earth

Is the position still immunized and why : Suppose the market interest rate immediately increases by 0.5% right after the portfolio is constructed. Is the position still immunized? Why

What is the function of the organelle : What is the function of the organelle indicated by the number 9 in the cell illustration above? What type of cell in the illustration above?

What is the opportunity cost of capital : What is the opportunity cost of capital and How is this rate used in discounted cash flow (DCF) analysis - Describe the following project breakeven

What is the optimal form of financing : what is the optimal form of financing (1) borrowing USD, (2) borrowing AUD, or (3) borrowing one-half of the funds from each of these sources

Essay on universal healthcare : Thesis: Implementing healthcare for all people is critical because it has far-reaching effects on public health, the economy, and national security.

Why do you want to participate in the summer program : Why Do You Want to Participate in the Summer Program and What Do You Hope to Gain From Your Participation in the Summer Program

Estimate the terminal value of the company : Estimate the terminal value of the company using a PE multiple. The industry PE multiple is 11. What is your new estimate of the company's stock price

How data goes from the web browser to the web server : Describe how data goes from the web browser to the web server and back, what can go wrong, and how to troubleshoot it.

User Account

All Pages