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$10.00 week 11

From Business: Finance , Business: International-Business
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Due on Dec. 13, 2011
Asked on Dec 10, 2011 at 3:23:15PM

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olubabson
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Short-Term Asset and Liability Management.

Use information contained in the Integrative Problem after Chapter 21 on pages 623 - 624 of your text book and develop responses to questions 1 through 5. You have to prepare 2-3 page report excluding cover page on your findings. Show all relevant computations

Kent Co. is a large U.S firm with no international business. It has two branches within the United States, an eastern branch and a western branch. Each branch currently makes investing or financing decisions independently, as if it were a separate entity. The eastern branch has excess cash of $15 million to invest for the next year. It can invest its funds in Treasury bills denominated in dollars or in any of four foreign currencies. The only restriction enforced by the parent is that a maximum of £5 million can be invested or financed in any foreign currency.

The western branch needs to borrow S15 million over 1 year to support its U.S. operations. It can borrow funds in any of these same currencies (although any foreign funds borrowed would need to be converted to dollars to finance the U.S. operations). The only restriction enforced by the parent is that a maximum equivalent of $5 million can be borrowed in any single currency. A large bank serving the international money market has offered Kent Co. the following terms:

CURRENCY	ANNUAL INTEREST RATE ON DEPOSITS	ANNUAL INTEREST RATE CHARGED ON LOAN
U.S Dollar	6%	9%
Australian	11	14
Canadian dollar	7	10
New Zealand dollar	9	12
Japanese yen	8	11

The parent of Kent Co. has created 1-year forecasts of each currency for the branches to use in making their investing or financing decisions:

CURRENCY	TODAY’S SPOT EXCHANGE RATE	FORECASTED ANNUAL PERCENTAGE CHANGE IN EXCHANGE RATE
Australian	$.70	-4%
Canadian dollar	.80	-2
New Zealand dollar	.60	+3
Japanese yen	.008

Questions

1. Determine the investment portfolio composition for Kent's eastern branch that would maximize the expected effective yield while satisfying the restriction imposed by the parent.

2. What is the expected effective yield of the investment portfolio?

3. Based on the expected effective yield for the portfolio and the initial investment amount of $15 million, determine the annual interest to be earned on the portfolio.

4. determine the financing portfolio composition for Kent's western branch that would minimize the expected elective financing rate while satisfying the restriction imposed by the parent.

5. What is the expected effective financing rate of the total amount borrowed?

Explain

Madura, J. (2010). International financial management. Mason, OH: Cengage Learning.