BM7027-15 International Financial Management

Question 1. (25 Marks)

The exchange rate information is as the following:

$/£ Spot                                   1.6580

12 months forward                  5¢ premium

1. Calculate the forward rate (appreciation in $) and also the spot rate of 12 months forward.    (4 marks)

Now, if you are told that the $/£ spot is 1.5345 and the dollar is expected to depreciate by 5% per year over the next two years and thereafter appreciate by 7% per year.

1. Calculate the forward rates for the next five years. (5 marks)

• What causes foreign exchange rates to move?

(300 words -8 marks)

1. Describe the different types of exchange rate system.

(300 words -8 marks)

Question 2.   (25 Marks)

Armacao plc wants to enter the electronics industry and is considering two possible projects. Both Projects require same outlay of £10 million and both have the same expected net present value. However, because this is a venture into a new area of business, Armacao only want to undertake one of the projects:

Semi-Conducto                 Silicon Chip

                                                                      Project                           project

State of the world          Prob                      NPV                      NPV

Strong growth                          0.20                       +30.6                    +13.0

Slow Growth                            0.60                       + 8.5                    +   8.5

Recession                               0.20                        – 13.6                  +   4.0

Calculate the following:

1. The Expected Net Present value of both the projects.

(7 marks)

1. Which project is viable for Armacao?

(2 marks)

1. Explain in detail the reason of your choice?

(150 words- 4 marks)

1. “Expected Net Present value provides a measure of the investment’s expected performance, whereas risk is concerned with the likelihood that the actual performance may diverge from what is expected” – Explain.

(500 words – 12 marks)

Question 3. (50 Marks)

1. What policies and payments does a firm’s “dividend policy” consist of? Why is determining dividend policy more difficult today than in decades past?                                          (1000 words –30 marks)

1. What do you think is the typical stock market reaction to the announcement that a firm will increase its dividend payment? Why?

                                                                            (750 words –20 marks)