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2. Identify and calculate possible profit opportunity using $1millon to make your

 

point. [10]

 

Explain the impact of your actions on anybody who tries to mimic your strategy after

 

you. [5]

 

Spot rate (Romulan/$)

 


 

1.281

 


 

3-mo forward (Romulan/$)

 


 

1.274

 


 

US dollar 3-month interest rate

 


 

4.80%

 


 

Romulan land 3-mo rate

 


 

3.20%

 


 

3. A recent graduate was hired to lead a small public company. In an effort

 

to increase the stock price of the company he proposed increasing the

 

dividends of the company. He explained ?since the stock price is

 

basically based off of present value of all future dividends, the stock

 

price will go up if we increase dividends paid to shareholders.? Do you

 

agree? Explain.

 

6. Your

 


 

company produces shoes in Vietnam and sells in Europe. Recently a

 

new progressive government was elected in Vietnam. Due to its new policies

 

there is high level of FDI going on in Vietnam. The standard of living has

 

improved. Minimum wage has gone up significantly. The currency has

 

appreciated significantly with respect to Euro. Does your company face any

 

exposure? If yes, recommend a course of action.

 

8. How much more would you be willing to pay for a security that pays $100

 

quarterly for 10 years compared to one that pays $100 quarterly forever?

 

Assume 12% APR

 

12. Eureka, Inc., a US-based company does business in Ukraine also. The currency of

 

Ukraine, hryvnia, is very volatile. There is always the possibility that hryvnia will

 

depreciate with respect to the dollar. The company will have to reports its assets in

 

Ukraine at lower value when consolidating its financial statements. Given this

 

possibility the CFO of the company has asked you to recommend an appropriate

 

action.

 

Value of Ukrainian assets today 60 million hryvnia

 

Spot rate 1USD = 6.70 hryvnia

 


 

180 day forward rate: 1 USD = 6.78 hryvnia

 

Interest rate in US = 6%

 

Interest rate in Ukraine = 10%

 

There are no currency options traded on NYSE for hryvnia.

 


 

16. Two banks, A & B, with assets of $100 million each experience severe

 

decline in the value of their equity when interest rates suddenly increases by

 

3%. However the losses experienced by bank A were two times that

 

experience by Bank B? What do you think was the likely reason behind this

 

observation?

 


 

17. Say for example AAPL has $60 billion in cash, $500 billion of equity, $0

 

in debt, $500 billion of assets, and ROE of 35%. Its competitors have ROE in

 

the range of 10% to 20%. Based on the concepts you have learned in this

 

class do you think there is still a lot more potential for the company to

 

improve its ROE. If yes, how? If not, why?

 


 

 


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