Question

1. Suppose a firm, that has a WACC of 11.8%, has expected free cash flows to the firm from U.S. operation of $4.1 million next year, $4.8 million in year 2, and $5.2 million in year 3. Also suppose the firm expects cash flows from European countries of 1.7 million Euro in year 1, 1.4 million Euro in year2, and 1.2 million Euro in year 3. The firm also expects cash flows from the U.K. of 1.3 million pounds in year1, 1.4 million pounds in year 2, and 1.3 million pounds in year 3. Further suppose that after year 3, the firm’s cash flows in the U.S. will grow at a constant rate of 4% indefinitely, the firm’s cash flows in the European countries will decrease at a rate of 2% indefinitely, and the firm’s cash flows in the U.K. will remain constant indefinitely. Further assume that the Euro/Dollar exchange rate is $1.28 and the Pound/Dollar exchange rate is $1.58. What is the value of this multinational firm?

2. Given the following information, determine the value of a currency call option and currency put option that expire in the next 6 months. (use the Table attached to the back of this exam)

- Spot price the Australian Dollar is $0.45

- The strike price of the option is $0.50

- The volatility of the Australian Dollar is 40%

- The expiration is 6 months

- The simple interest rate in the U.S. is 3%

- The simple interest rate in the U.K. is 4%

Answer 1

		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=WACC=11.8%	0.118
		N=Year of Cash Flow
		US Operations
	CF3	Cash Flow in year 3	$5,200,000
	g	Constant Growth rate indefinitely	0.04
	CF4=CF3*(1+g)	Cash Flow in year 4	$5,408,000
	H3=CF4/(i-g)	Horizon Value (Value of future cash flows in year 3)	$69,333,333	(5408000/(0.118-0.04)
		N	CF	PV=CF/(1.118^N)
		Year	Cash flow	PV of cash flow
	CF1	1	$4,100,000	$3,667,263
	CF2	2	$4,800,000	$3,840,233
	CF3	3	$5,200,000	$3,721,156
	H3	3	$69,333,333	$49,615,420
			SUM	$60,844,073
	V(US)	Present Value of Free Cash Flows	$60,844,073
		EUROPEAN COUNTRIES
	CF3	Cash Flow in year 3	€            1,200,000
	g	Constant Decrease rate indefinitely	(0.02)
	CF4=CF3*(1+g)	Cash Flow in year 4	€            1,176,000
	H3=CF4/(i-g)	Horizon Value (Value of future cash flows in year 3)	€            8,521,739	(1176000/(0.118+0.02)
		N	CF	PV=CF/(1.118^N)
		Year	Cash flow	PV of cash flow
	CF1	1	€      1,700,000.00	€      1,520,572.45
	CF2	2	€      1,400,000.00	€      1,120,068.10
	CF3	3	€            1,200,000	€          858,728.42
	H3	3	€            8,521,739	€      6,098,216.30
			SUM	€      9,597,585.27
	A	Present Value of Free Cash Flows	€      9,597,585.27
	B	Euro dollar exchange rate	$1.28
	V(EUROPEAN)	Present Value of Free Cash Flows	$         12,284,909
		UK OPERATIONS
	CF3	Cash Flow in year 3	£            1,300,000
	g	Constant growth rate indefinitely	0.00
	CF4=CF3*(1+g)	Cash Flow in year 4	£            1,300,000
	H3=CF4/(i-g)	Horizon Value (Value of future cash flows in year 3)	£         11,016,949	(1300000/0.118
		N	CF	PV=CF/(1.118^N)
		Year	Cash flow	PV of cash flow
	CF1	1	£            1,300,000	£      1,162,790.70
	CF2	2	£            1,400,000	£      1,120,068.10
	CF3	3	£            1,300,000	£          930,289.12
	H3	3	£         11,016,949	£      7,883,806.10
			SUM	£          11,096,954
	A	Present Value of Free Cash Flows	£         11,096,954
	B	Euro dollar exchange rate	$1.58
	V(UK)	Present Value of Free Cash Flows	$         17,533,187
		Value of the Multinational Firm=V(US)+V(EUROPEAN)+V(UK)
		Value of the Multinational Firm	$90,662,169