Question

5) ABC imports extreme condition outdoor wear and equipment from XYZ located in Canada. With the steady decline of the U.S dollar against the Canadian dollar ABC is finding a continued relationship with XYZ to be an increasingly difficult proposition. In response to ABC's request, XYZ has proposed the following risk-sharing arrangement. First, set the current spot rate as the base rate. As long as spot rates stay within 5% (up or down) ABC will pay at the base rate. Any rate outside of the 5% range, XYZ will share equally with ABC the difference between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the upper and lower limits for trading to take place at C$1.20?

A) C$1.205/$ - C$1.195/$

B) C$1.15/$ - C$1.25/$

C) C$1.14/$ - C$1.26/$

D) none of the above

6) The weighted average cost of capital (WACC) is:

A) the required rate of return for all of a firm's capital investment projects.

B) the required rate of return for a firm's average risk projects.

C) not applicable for use by MNE.

D) equal to 13%.

7) The capital asset pricing model (CAPM) is an approach:

A) to determine the price of equity capital.

B) used by marketers to determine the price of saleable product.

C) that can be applied only to domestic markets.

D) none of the above

8) The after-tax cost of debt is found by:

A) dividing the before-tax cost of debt by (1 - the corporate tax rate).

B) subtracting (1 - the corporate tax rate) from the before-tax cost of debt.

C) multiplying the before-tax cost of debt by (1 - the corporate tax rate).

D) subtracting the corporate tax rate from the before-tax cost of debt.

Answer 1

5. Option C: C$1.14/$ - C$1.26/$

Computation of lower & upper limit is as below:

Spot rate	1.2
Upper limit (105% of spot rate)	1.2*105% =1.26
Lower limit (95% of spot rate)	1.2*95%=1.14

6.Option B: the required rate of return for all of a firm's capital investment projects.

WACC is used as a decision making tool for all of the capital investment projects of a firm to ensure that the cost of capital is being recovered from the projects to be undertaken.

7.Option A: to determine the price of equity capital.

CAPM is a model that helps determine the value of equity.

8.Option C: multiplying the before-tax cost of debt by (1 - the corporate tax rate).

Cost of debt= Before tax cost of debt * (1- corporate tax rate)