Economics-AW-Q421 Online Services
Foreign Investment Analysis
Chapman, Inc.’s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 5 pesos in dividends in 1 year after all foreign and U.S. taxes have been subtracted. The exchange rate in 1 year is expected to be $0.05 per peso. After this, the peso is expected to depreciate against the dollar at a rate of 5% a year forever due to the different inflation rates in the United States and Mexico. The peso-denominated dividend is expected to grow at a rate of 7% a year indefinitely. Chapman owns 20 million shares of V. Gomez. What is the present value of the dividend stream, in dollars, assuming V. Gomez’s cost of equity is 14%? Do not round intermediate calculations. Round your answer to the nearest dollar. Enter your answer in dollars.
At today’s spot exchange rates 1 U.S. dollar can be exchanged for 11 Mexican pesos or for 111.35 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? Round your answer to two decimal places.
___________ yen per peso
Bayani Bakery’s most recent FCF was $45 million; the FCF is expected to grow at a constant rate of 6%. The firm’s WACC is 14% and it has 15 million shares of common stock outstanding. The firm has $30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has $368 million in debt and $63 million in preferred stock.
a. What is the value of operations? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ ___________ million
b. Immediately prior to the repurchase, what is the intrinsic value of equity? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ ____________ million
c. Immediately prior to the repurchase, what is the intrinsic stock price? Round your answer to the nearest cent.
$ _____________ per share
d. How many shares will be repurchased? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
___________ million shares
How many shares will remain after the repurchase? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
_____________ million shares
e. Immediately after the repurchase, what is the intrinsic value of equity? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ _____________ million
The intrinsic stock price? Round your answer to two decimal places.
$ _____________ per share
A firm has 10 million shares outstanding with a market price of $15 per share. The firm has $20 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What is the firm’s value of operations after the repurchase? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ ¬¬¬¬¬_________ million
How many shares will remain after the repurchase? Round your answer to the nearest whole number.
Purchasing Power Parity
A computer costs $610 in the United States. The same model costs 560 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Round your answer to two decimal places.
$1 = ______________ euros
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Suppose you own 1,000 common shares of Laurence Incorporated. The EPS is $9.00, the DPS is $4.00, and the stock sells for $85 per share. Laurence announces a 2-for-1 split. Immediately after the split, how many shares will you have?
What will the adjusted EPS and DPS be? Round your answers to the nearest cent.
EPS $ ____________
DPS $ _____________
What would you expect the stock price to be? Round your answer to the nearest cent.
Exchange Gains and Losses
Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a 57 million peso loan from a Mexico City bank last month to fund the expansion of your Monterrey, Mexico plant. When you took out the loan the exchange rate was 73 U.S. cents per peso, but since then, the exchange rate has dropped to 68 U.S. cents per peso. Has Wruck Enterprises made a gain or a loss due to the exchange rate change, and how much? Note that your shareholders live in the United States. Round your answer to the nearest dollar. Enter your answer in dollars.
The company made a ______________
Of $ _________________ .
Residual Distribution Model
Puckett Products is planning for $2.4 million in capital expenditures next year. Puckett’s target capital structure consists of 30% debt and 70% equity. If net income next year is $2.5 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? Round your answer to two decimal places.
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