UB MGF 401 - Old_Final_Questions_Ch12_&_Ch22_-_Spring_2007 (3 pages)

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Final Exam Questions Ch 12 Ch 22 MGF 301 On January 6 2002 Argentina changed its 10 year policy of pegging its peso to the U S dollar Overnight the value of the peso changed from 1 peso per dollar to 1 55 pesos per dollar Which of the following is true a the Argentinian peso became stronger compared to the U S dollar b the U S dollar became stronger compared to the Argentinian peso c there is no change in the foreign exchange rate between the U S dollar and the Argentinian peso d none of the above are true An American investor buys 100 shares of London Bridges at a price of 23 or 23 UK pounds when the exchange rate is 2 1 or 2 dollars 1 pound A year later the company paid a dividend of 2 and the stock was selling for 20 after the dividend What is the one year overall rate of return to the American investor if the exchange rate is 2 1 1 after one year 6 points Investment 23 x 100 2300 x 2 4 600 Dividend 2 x 100 200 x 2 1 420 Ending Investment 20 x 100 2000 x 2 1 4 200 Overall Return 4200 4600 420 4600 00435 or 435 The total book value of WTC s equity is 10 million The stock of WTC is currently selling for a price of 30 per share and there are 500 000 shares outstanding The bonds of WTC have a face value of 6 million and sell at a price of 90 percent of face value The yield to maturity on the bonds is 8 percent and the firm s tax rate is 35 percent If the required return on equity is 14 calculate the WACC 6 points Market value of equity 30 x 500 000 15 million Market value of debt 9 x 6 million 5 4 million WACC 15 20 4 x 14 5 4 20 4 x 08 x 1 35 1029 01376 1167 or 11 67 percent If the company above is considering expanding into a foreign country to produce its current product is the WACC appropriate as the discount rate for its NPV calculation Explain 6 points The WACC is appropriate only if 1 the expansion is financed using the same mix of debt and equity as the firm currently uses and 2 there is no additional risk from legal rules changing in the new country as