6 questions on currencies: profits from triangular arbitrage, spread, bid rate, ask rate, Forward rates, exchange rate for portfolio valuation, interest rate parity

1. Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics. Ackerman and Bos have the following information available to them: Spot Rates Bid Price Ask Price Euro/US$ 1.0000 1.00 ...continues

Forward rates/law of one price

1. A currency trader has compiled the following currency quotes: USD/EUR ($/Euro USD/GBP ($/£) JPY/USD (¥) Spot rate $1.2139 $1.7730 115.674 6-month forward rate $1.2067 $1.7894 114.867 Which of the following statements regarding currencies is CORRECT? ...continues

Levered and unlevered firms

a) Firm A is an all equity financed firm. Its current equity price is £1.06 cum dividend. Also, its current earnings per share (eps) and current dividend payment are 20p and 12p, respectively. The market expects the ratio of eps to dividend to stay the same in the future. Firm A's rate of return on reinvested funds is equal to ...continues

Factoring Receivables

A firm has an average collection period of 48 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case, assuming the default is extremely unlikely?

Present and future value calculations

Your uncle has given you three alternatives for your inheritance. You can have $5,000 now; $1,000 per year for the next eight years; or $12,000 at the end of eight years. You assume your opportunity cost or discount rate is 11% interest annually. 1. Which inheritance alternative would be best? Why? 2. Would your decis ...continues

Financial Analysis

1. As of December 1999, Amazon.com had never paid a dividend and the market value of its stock was $37 billion. Does this invalidate the dividend discount model? Why or why not? 2. Which capital budgeting technique is consistent with maximizing shareholder wealth and why? 3. WACC is also referred to by 3 other names. ...continues

During January the following selected transactions occurred...

P2-1A On January 1, 2002, the ledger of Van Manen Company contains the following liability accounts. During January the following selected transactions occurred. Accounts Payable $52,000 Sales Taxes Payable 7,500 Unearned Service Revenue 16,000 Jan. 5 Sold merchandise for cash totaling $16,632, which includes 8% sal ...continues

The opportunity cost of capital is 8 percent.

4. Smith Devices is contemplating the purchase of National Widget Company. The values of the two companies as separate entities are $20 million and $10 million, respectively. Smith estimates that by combining the two companies it will reduce marketing and administrative costs by $500,000 per year in perpetuity. Smith is will ...continues

spot/forward rates/covered interest rate parity

Doug Wyatt is a currency trader for Global Currency Exchange Inc. Wyatt has compiled the following information concerning the U.S. dollar ($) / Australian dollar (AUD) exchange rate. - Spot bid rate: $0.745 - Spot ask rate: $0.749 - 3-month forward bid rate: $0.752 - 3-month forward ask rate: $0.754 Which of the foll ...continues

What is the WACC?

Smith and Jones Widget company has total capital, consisting of long-term debt and common equity of $80 million. Thirty-two million of total capital is in the form of long-term debt, which carries a cost of 12 percent. The company's equity carries a cost of 19.50 percent. If the company's tax rate is 38 percent, what is the W ...continues