What was the amount of the exchange gain or loss

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Reference no: EM133369412

Questions:

(a) DSM Academy needs to raise funds to build a new school. It is considering the use of either preferred equity or common equity to finance this investment proposal.

(i) Discuss TWO (2) differences between preferred equity and common equity as a source of financing.

(ii) Besides equity financing, DSM Academy is also considering the use of long-term debt financing. Discuss TWO (2) differences between debt and common equity as a source of financing.

(iii) Discuss TWO (2) factors that may affect the cost of long-term debt financing.

(b) Fruity Paradise is a Singapore wholesale company that imports fruits from Australia. Its transactions with counterparties in Australia are mainly in Australian dollars (A$).

(i) Would Fruity Paradise be more concerned with the appreciation or depreciation of A$ against the Singapore dollar (S$)?

(ii) As the finance manager of Fruity Paradise, you are tasked to manage the company's foreign exchange risks by using either forward contracts or options. Explain the difference between a forward contract and an option as a hedging instrument.

(iii) On 28 Feb 202X, Fruity Paradise bought A$80,000 worth of fruits from a farm in Australia. The spot rate was A$1 = S$0.92 and the settlement date was 31 Mar 202X. To hedge this foreign exchange risk, Fruity Paradise entered into a forward contract to "buy" A$80,000 at A$1 = S$0.98 on 31 Mar 202X. Calculate the cost of hedging incurred by Fruity Paradise.

(iv) If Fruity Paradise had chosen not to hedge its exposure, would the company experience an exchange gain or loss if the spot rate subsequently rose to A$1=S$0.95 on 31 Mar 202X? What was the amount of the exchange gain/loss?

Reference no: EM133369412

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