# Project #19880 - Problem

1 Bluejacket Custom Steel, headquartered in Fairfax, Oklahoma, is planning to build a factory in Poland to manufacture and sell custom steel products in the Polish market. The new factory will have an initial dollar-denominated cost of \$500 million, although construction requires that the dollar investment in the project first be converted to Polish Zlotys at the current exchange rate of \$0.3200/ZT1. Over the next five years, Bluejacket plans to reinvest 100 percent of the Zloty-denominated cash flows from the project to expand production capacity in Poland to meet projected increases in Polish demand for custom steel. At the end of five years, Bluejacket expects to sell the steel plant to a syndicate of Russian investors for ZT3350 million Polish Zlotys (ZT 3.35 billion). Camille Tallchief, Bluejacket's CFO, has used a forecasting model based on Relative Purchasing Power Parity to project that when the plant is sold at the end of five years, the Zloty-denominated proceeds from the sale can be converted to dollars at an exchange rate of \$0.2802/ZT1. Assuming that the interest rate on default-free bonds in the U.S. is currently 4 percent per year,

a. determine the current Zloty-denominated cost of the Polish factory

b. determine Bluejacket’s internal rate of return for the project

c. determine the current interest rate for risk-free bonds in Poland.

2 Talala Steel Fabrication TSF has just sold an order of steel beams to a customer in France. The terms of the sale call for the French customer to pay TSF €10,000,000 (i.e., 10,000,000 euros) in exactly one year. The risk-free US interest rate is currently 2.5 percent, while the interest rate for risk-free euro-denominated loans is currently 4 percent. The spot exchange rate between the dollar and the euro is \$1.3955/€1, while the forward exchange rate for the exchange of dollars and euros at the end of one year is \$1.3725/€1. Based on the fact that the euro is projected to depreciate against the dollar, the Chief Financial Officer for TSF believes that a forward market hedge should be used to reduce the company's exposure to fluctuations in the exchange rate between the dollar and the euro. Using the information given above, evaluate the CFO's decision to use a forward market hedge, instead of using a money market hedge

 Subject Business Due By (Pacific Time) 12/14/2013 10:00 pm
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