I just don't understand how my teacher came up with this answer and numbers in it. Can anyone help me with this, please?
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Today November 1, 2010 Plus sold a shipment of ice-skates to Sander in Amsterdam, The Netherlands, for €4,000,000, payable €2,500,000 on June 1, 2011, and €1,500,000 on February 1, 2012. The current spot rate of €0.72/$. Plus' director of finance now wondered if he should protect the firm against a possible future weakening of the Euro. Four approaches were possible:
1. Hedge in the forward market. The seven-month forward exchange quote was €0.75/$ and the fifteen-month forward quote was €0.76/$.
2. Hedge in the money market. Plus could borrow euro’s in Amsterdam, from the Dutch correspondent of its U.S. bank, at 5.1% per annum.
3. Hedge with foreign currency options. Seven month put options were available at a strike price of €0.77/$ for a premium of 1.2%, and Fifteen month put options at €0.78/$ were available for a premium of 3%. Call options for the same dates are and the same strike prices are resp. 4% and 1.5%.
4. Do nothing. Plus could wait until the sales proceeds were received in June and February and at that time sell the Euros received for dollars in the spot market.
Plus was able to borrow dollars from its U.S. bank at 5% per annum, and its cost of equity capital was estimated to be 18% per annum.
Required:
a. Calculate the WACC (debt/equity ratio is 1.2 and tax rate is 34%)
Answer given by my teacher is:
WACC = 5/11 * 18% + 6/11 * 5% * 66% = 9.98%
Where does he get this 5/11 and 6/11 from?
My second question is : how do I calculate the "Hedge in the money market. Plus could borrow euro’s in Amsterdam, from the Dutch correspondent of its U.S. bank, at 5.1% per annum." using the WACC as well?
The answer given is (using WACC of 9.98%): $5,995,354
Thank you in advance.
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Today November 1, 2010 Plus sold a shipment of ice-skates to Sander in Amsterdam, The Netherlands, for €4,000,000, payable €2,500,000 on June 1, 2011, and €1,500,000 on February 1, 2012. The current spot rate of €0.72/$. Plus' director of finance now wondered if he should protect the firm against a possible future weakening of the Euro. Four approaches were possible:
1. Hedge in the forward market. The seven-month forward exchange quote was €0.75/$ and the fifteen-month forward quote was €0.76/$.
2. Hedge in the money market. Plus could borrow euro’s in Amsterdam, from the Dutch correspondent of its U.S. bank, at 5.1% per annum.
3. Hedge with foreign currency options. Seven month put options were available at a strike price of €0.77/$ for a premium of 1.2%, and Fifteen month put options at €0.78/$ were available for a premium of 3%. Call options for the same dates are and the same strike prices are resp. 4% and 1.5%.
4. Do nothing. Plus could wait until the sales proceeds were received in June and February and at that time sell the Euros received for dollars in the spot market.
Plus was able to borrow dollars from its U.S. bank at 5% per annum, and its cost of equity capital was estimated to be 18% per annum.
Required:
a. Calculate the WACC (debt/equity ratio is 1.2 and tax rate is 34%)
Answer given by my teacher is:
WACC = 5/11 * 18% + 6/11 * 5% * 66% = 9.98%
Where does he get this 5/11 and 6/11 from?
My second question is : how do I calculate the "Hedge in the money market. Plus could borrow euro’s in Amsterdam, from the Dutch correspondent of its U.S. bank, at 5.1% per annum." using the WACC as well?
The answer given is (using WACC of 9.98%): $5,995,354
Thank you in advance.