the us government decides to protect the coal industry it

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PROBLEMS

. 1)The US government decides to protect the coal industry. It spends $10 billion yearly for 15 years. The industry starts returning $.3 billion per annum in year 13 and for 50 years following year 13. The Coc is 11%.Derive the decision that is appropriate.

2) Let us say that the protectionism of the coal industry is in the form of a tariff. Talk on the benefits and costs of a tariff. Do the benefits exceed the costs or vise versa? Ascertain you include the terms of trade. Also, what is an optimal tariff?

3) Micca metals, Inc is a sspecialty materials and metals company located in Detroit, Michigan. the company specializes in specific precious metals and materials that are used in a verity of pigment applications in may industries including cosmetics, appliences and a veritey of high tinsel metal fabricating equipment. Micca just purchased a shipment of phosphates from Morocco for 6,000,000 dirhams, payable in 6 months. 6-month call options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available from Bank Al-Mughrub at premium of 2%. 6-month put options on 6,000,000 dirhams at an exercise price of 10.00 dirhams per dollar are available at a premium 3%. compare and contrast alternative ways that Micca might hedge its foreign echange transaction exposure. what is your recommendation?

Assumption:

Shipment of phosphate from Morocco, Moroccoan dirhams6,000,000

Miccas cost of capital (WACC)14.000%

Spot exchange rate, dirhams/$10.00

6-month forward rate, dirham/$10.40

4) Also, I want to add to problem # 11.15 whether the result on the balance sheet of Banghok subsidiary is an accurate description of the status of Banghok subsidiary, as a result of the devaluation of the baht? Expound profoundly in the context of a net present value cash flow analysis of the subsidiary

you should discuss also the effects of the 2 FAS on the equity and income statement of the company.

Page 329 11-8 Bangkok Instrumets, Ltd (A)

Bangkok Instruments, Ltd. the Thai subsidiary of a U.S corporation, is a seismic instrument manafacturer. Bangkok Instruments manufactures instruments primarily for the oil and gas industry globally, though with recent commodity price increases of all kind-including copper- its business has begun to grow rapidly. Sales are primarily to multinational companies based in the United States and Europe. bangkok Intruments’ balance sheet in thousands of Thai baht (B) as of arch 31 is as follows:

Bangkok Instruments, Ltd. Balance sheet, march1, thousands of Thai bahts

AssetsLiabilities

CashB24,000Accounts PayableB18,000

Account Receivable36,000Bank Loan60,000

Inventory48,000Common Stock18,000

Net Plant #038;Equipment60,000Retained earnings72,000

Total B 168,000TotalB168,000

Exchange rates for translating Siam Toy’s balance sheet into US dollars are:

B$40.00/$April 1st exchange rate after 25% devaluation

B30.00/$ March 31st exchange rate, before 25% devaluation. all inventory was acquired at this rate

B20.00/$ Historic exchange rate at which plant and equipment were acquired.

The Thai dropped in value from B30/$ to B40/$ between march 31 and april 1. assuming no change in balance sheet accounts between these two days, calculate the gain and loss from translation by both the current rate method and the temporal method. explain the translation gain or loss in terms of changes in the value of exposed accounts.

ESSAYS

*A. A devaluation of the foreign currency of our affiliate usually creates a translation loss.

Analyze 1) how we can hedge those probable losses by a) a forward contract and b) a balance sheet hedge. Are those tools appropriate? Expound.

2) Is the accounting information resulting as a byproduct of a depreciation of the foreign currency accurate? That is, is the translation loss, if it occurs, truthful? Elaborate in the context of a situation where the depreciation lasts 12 years and the affiliate sells most of its production to the US market, while it generates most of its expenses in, let us say, Nigerian nira. Specifically, elaborate on what really happens to the value of that affiliate?

B. The world is really fond of US made goods and is buying $180 billion more of US made goods versus what the US is buying from them this year. (Thus, the surplus is $180 billion this year).At the same time, there is a huge recession in the States, and the central bank is injecting massive liquidity into the system (around $940 billion more money.) Because the public is scared, it responds differently from the way it usually does in such a situation. Specifically, the public holds more money rather than less, as it would generally, and it raises its money holdings by $840 billion. Explicate what will happen to the value of the dollar. Why? Presuppose that both the current account view and the monetary approach to ERs are app

 

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