Lakonisho Equipment has an investment opportunity in Europe. The project costs €10.5 million and it is expected to produce cash flows of €1.7 million, €2.4 million, and €3.3 million, for years 1, 2 and 3 respectively. The current spot exchange rate is $1.36/€; the current risk-free rate in the United States is 2.3%, compared to that in Europe of 1.8%. The appropriate discount rate for the project is estimated to be 13%, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of the 3 years for an estimated €7.5 million. What is the NPV of the project? What is the IRR of the project? Should Lakonisho Invest in this project?

Differential Analysis Involving Opportunity Costs

On July 1, Midway Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $149,800 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:

Required:

1. Prepare a differential analysis as of July 1 presenting the proposed operation of the warehouse for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

2. Based on the results disclosed by the differential analysis, should the proposal to operate a retail store be accepted?

3. If the proposal is accepted, what is the total estimated income from operations of the warehouse for the 16 years?
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1.  What information does the Income Statement, Balance Sheet and Cash Flow Statement provide to various users? Why is the Income Statement constructed first and the Cash Flow Statement contructed last? What type of accounts are in each statement?

2. What is the difference between an accrual basis and cash basis of accounting? What type of companies might use each basis and why? What is GAAP and who determines GAAP? What is IFERs and what impact might it have in the future towards U.S. GAAP?

3. What is the accounting cycle? What types of accounting records are needed within this accounting cycle? How might an accounting system be expanded beyond the basic accounting records? What types of accounting checks are available to make sure we are constructing the statements accurately?

4. Identify and explain five theoritical concepts, assumptions and/or constraints that might be within an accrual basis of accounting, (i.e. matching concept). Give an example of an account affected by each theory you mention. What are some differences with U.S. GAAP and IFERs in certain financail accounting areas?

5. Identify five different accounts that might be affected by different accounting treatments, (i.e. inventory could be accounted for by the LIFO or FIFO cost flow assumptions).

6. How does the type of company, (service, merchandise or manufacturing) affect the accounting records?

7. How does the ownership of a company, (sole proprietorship, partnership or corporation affect the accounting records?

8. What limitations are present in the financial statements for various users? Be as specific as possible.

2. Analyzing the effects of a trade deficit

You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about the level of fruit and vegetable imports to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a quota on imports would shrink the size of the deficit. The following exercise will help you to analyze this claim.

The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market.

Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the quota.

Draw the demand and supply curves and provide brief explanations about the exchange rate and the value of the domestic currency in each case. Note: you just need to state whether the dollar has appreciated or depreciated and whether the exchange rates (R) goes up or down) (after drawing the graphs). Note: be sure to use the currency of the foreign country implied in each question!

a) An increase in the growth rate of U.S., real GDP relative to Japan (assume Japan and the U.S. are important trading partners).

b) Americans become more bullish on the Japanese economy.

c) Inflation in the U.S. edged up relative to the one in Japan.

Draw the demand and supply curves and provide brief explanations about the exchange rate and the value of the domestic currency in each case. Note: you just need to state whether the dollar has appreciated or depreciated and whether the exchange rates (R) goes up or down) (after drawing the graphs). Note: be sure to use the currency of the foreign country implied in each question!

a) Real GDP growth in Britain rose relative to the U.S. (assume that the two countries are important trading partners).

b) Inflation in Great Britain rose relative to the inflation rate in the U.S.

c) The British became bullish (that is, they feel good) about the U.S. economy.

Bank USA recently purchased $10 million worth of euro- denominated one-year CDs that pay 10 percent interest annually. The current spot rate of U.S. dollars for euros is $1.30/€1. (LG 9-5)

a. Is Bank USA exposed to an appreciation or depreciation of the dollar relative to the euro?

b. What will be the return on the one-year CD if the dollar appreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.20/€1?

c. What will be the return on the one-year CD if the dollar depreciates relative to the euro such that the spot rate of U.S. dollars for euros at the end of the year is $1.40/€1?

The length of maternity stay in U.S. hospitals is normally distributed, with mean of   3.5   days and a standard deviation of   1.2   days. We randomly survey   91   women who recently bore children in U.S. hospitals.

Let   X=   maternity stay in U.S. hospital, and   X¯=   average maternity stay for a sample of size   91 .

  X∼    (pick one) BPEN (  ,  ) .

  X¯∼    (pick one) EPNB (  ,  ) .

   What is the probability that the average stay is more than   3   days?

P(X¯>3)=   

   Which of the following is more likely?

   an individual stays more than   5   days      the average stay of   91   women was more than   5   days

#71 Suppose that both the nominal exchange rate (Mexican Peso/U.S. Dollar) is falling and that the ratio of the prices (U.S. Dollar/Mexican Peso) is also falling. If the demand for U.S. Dollars relative to the Mexican Peso is rising, which open market theory do we believe is most consistent with our economy?

a. Purchasing Power Parity b. Open Economy Model c. Both a and b d. Neither a nor b

Answer is B, but why? What exactly is Purchasing Power Parity? What exactly is the Open Economy Model? What concepts do i need to understand to be able to get to this answer?