1.B   2. B, secured debt not WACC, A. 3.A  4.D  5. tax advantages, off balance sheet financing, lower borrowing costs, flexibility under bankruptcy.  6.B  7. B    8. A   9.A   10. A   11.international fisher effect says that differences in inflation are = to the level of currency appreciation and depreciation and that the real rate never changes. 

12. A forward contract is a customized agreement between to parties to exchange a specified amount of currency at a specified exchange rate on a specified day.

13. A and B accepted

14.B

15.B

Problems

1.  a. -144.03, Cash flows related to lease are 5600, -1802.4, -2052, -1387, -1222, discount this at 6% (10%(1-40%)) to get -59.64.  Discount the salvage value of -120 (-200 (salvage) + 80 (tax impact)) at 9.2% to get -84.38.  Add the two numbers to get the NAL of -144.03.  You may get answer that is slightly different, depending on how you handled some of the cash flows. Basically answers between -60 and -150 lost very few points). b. should borrow and buy.

2.  a. cf0=61, c01-c10=-10 then take npv at 11%=2.10, then take npv of -10 (salvage)(cf0=0, c01-c9=0,c10=-10) at 14%=-2.69.  Add the two numbers, -.59, this is NAL.  B. reject the project as both NPV and NPV + NAL are negative.

3.  fv=1000,n=15*2=30,pv=-1132,pmt=80/2=40, => i=3.3*2=6.6

4.  pmt=40/2=20,fv=1000,i=9/2=4.5, n=20*2=40, => -539.96.  then 20000000/539.96=37039 bonds.

Second number 3. 1.65-1.61/1.61=2.48%.  However, this rate is for 6 months, so we must double it for a full year, 4.96%  dollar is appreciating, so rates in U.S. are lower by 4.96%, therefore 7-4.96=2.04. If dollar had been depreciating, then U.S. would have higher interest rates and higher inflation.

Inflation in U.S is 4.96% lower. The difference in inflation and interest rates is equal to the level of appreciation/depreciation.

4.  1.7*15000=25500

7.  12,692,307

8.  1 dollars = 6145.92 shillings or 1 shilling = $.000163