Question

a) Microsoft, whose global sales are generally dollar denominated, finds it has excess cash of $750,000,000, which it can invest for up to three years. It has determined that its best options are either a three-year Euro-dollar ($) deposit paying 4.5% or a three-year Euro denominated deposit paying 5.5% since it expects the Euro to depreciate 1% per annum against the dollar over the next three years. Using cash flow analysis, determine in which currency Microsoft should invest. Be sure to show your complete calculations of the annual return and conversion of Euro back to dollars at the end of the three-year term. Assume that the annual interest amount is reinvested, i.e. compounds, at the same annual interest rates. Would your answer change if Microsoft revised its outlook for the Euro to depreciate 1.25% per year?

b) British Oxygen whose global sales are generally dollar denominated needs to borrow $50,000,000 for working capital and intends using a 5-year multi-currency revolving credit. It can borrow in US$ at 8.5% p.a. or in SFr at 5.5% p.a. However, it expects the SFr to appreciate on average 4% p.a. over the next five years. Using a cash-flow analysis determine in which currency BOC should borrow. Would your answer change if BOC could issue SFr commercial paper supported by the revolving credit at 3.5%?

Answer 1

SOLUTION: a) TO CALCULATETHE FUTURE VALUE For euro-dollar @4.5% = Cox (1 + r)' 20 FV FV- Future value Co Cash Flow periods IS $750,000,000 R Rate of return is 4.5% N-number ofperiod is 3 years

Therefore, FV-750,000,000xEx(1+0.055) FV-750,000,000x Ex1.1742414 FV -880, 681 031.3E Note (D: It expects the Euro to depreciate 1% per annum against the dollar over the next three years and wants to convert the FVin dollars for euro deposit Therefore, Es (Exchange rate euro/dollar at year 3

B) TO CALCULATION OF FUTURE VALUE: Let us assume, No interest, after one year, the SFr borrowed will cost 4% more to repay To find the borrowed money: Now add the interest, this is done by multiplying. Borrowed money *SFr appreciate rate SFr Rate Borrowed money*(1.04)*(1.055)-Borrowed money *1.0972 Hence, If you boirow any amount its true at any tine

Now, We use a generic borrowed money and one year. The USS Borrowed money*1.085 Hence, So the USS loan would be better, since the 1.085 multiplier is less than the 1.0972 multiplier .If the interest went down to 3.5% the answer does change. The SFr still appreciate at an expected 4% pa. Borrowed money*(1.04)*(1.035)- BorTowed money 1.0764 Since 1.0764 is less than 1.085, money would be saved by borrowing the money in SFr . .