Final Exam Questions (Ch 12 & Ch 22)MGF 301On 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 ofthe 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 trueAn 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 = $4,600Dividend = £2 x 100 = £200 x 2.1 = $420Ending Investment = £20 x 100 = £2000 x 2.1 = $4,200Overall 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 millionMarket value of debt = .9 x 6 million = 5.4 millionWACC = (15/20.4) x .14 + (5.4/20.4) x .08 x (1-.35)= .1029 + .01376 = .1167 or 11.67 percentIf 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 compared to the U.S.FORMULASExact Return (using known probabilities): E(r) = p1r1 + p2r2 + ... + pnrnEstimated Return (using actual returns): E(r) = (r1 + r2 + ... + rn)/nExact Variance (using known probabilities): Var(r) = p1[r1 – E(r)]2+ p2[r2 – E(r)]2 + ... + pn[rn – E(r)]2Estimated Variance (using actual returns):Var(r) = {[r1 – E(r)]2+ [r2 – E(r)]2 + ... + [rn – E(r)]2} / nStd Dev = square root of VarActual Return (or holding period return) = (P1 – P0 + Div)/P0Capital Gain = (P1 – P0)/P0 Dividend Yield = Div/P0Accounting Break-Even Level of Sales = (Fixed costs + Depreciation)/Variable Marginwhere variable margin is the profit from selling an additional unit (or dollar)Economic Profit = Accounting Profit – Additional Cost of CapitalEconomic Profit = Accounting Profit – (Opportunity Cost of Capital – Depreciation)Opportunity Cost of Capital = Initial investment/Annuity Factorwhere annuity factor is calculated for the life of the project at the discount rateCAPM: Ri = RF + βi (RM – RF)EAR = [1+(r/m)]m -1PV = CT/(1+r)T or PV = FVT/(1+r)TFVT = C0 x (1+r)T or FVT = PV x (1+r)TPerpetuity: PV = C1/rGrowing Perpetuity: PV = C1 / (r-g)Annuity: PV = C1 x [1/r – 1/r(1+r)T](1 + real interest rate) = (1 + nominal interest rate) / (1 + inflation rate)2Bond rate of return = (coupon income + price change) / investmentExpected return on stock = r = (DIV1 + P1 – P0)/ P0Dividend Discount Model: P0 = DIV1/(1+r)1 + DIV2/(1+r)2 + .... + (DIVH + PH)/(1+r)HNo Growth Dividend Discount Model: P0 = DIV1 / r or P0 = EPS1 / rConstant Growth Dividend Model: P0 = DIV1 / (r – g)where Expected rate of return: r = DIV1 / P0 + gg = sustainable growth rate = return on equity x plowback ratioPVGO = PV of firm with growth options– PV of firm without growth optionsDirect Exchange Rate: 1 foreign currency unit = $x dollarsIndirect Exchange Rate: x foreign currency units = $1 dollarDirect Exchange Rate = 1/Indirect Exchange RateWACC = (D/V) x (1-Tc) x rD + (E/V) x