Role of Economic Value and Replacement Value
Critically evaluate these comments. Please do not wander; concentrate on the issues described by the quotation.
- "To me, economic value is the only justifiable basis for measuring plant assets for purposes of evaluating performance. By economic value, I mean the present value of expected future services. Still, we do not even do this acquisition of new assets - that is, we may compute a positive net present value, using discounted case flow; but we record the asset at no more than its cost. In this way, the excess present value is not shown in the initial balance sheet. Moreover, the use of replacement costs in the subsequent years is also unlikely to result in showing economic values. The replacement cost will probably be less than economic value at any given instant of an asset's life."
- "Market values are totally unappealing to me because they represent a second-best alternative value- that is, they ordinarily represent the maximum amount obtainable from an alternative that has been rejected. Obviously, if the market value exceeds the economic value of the assets in use, they should be sold. However, in most instances, the opposite is true; market values of individual assets are far below their economic value in use."
- "The obtaining and recording of total present values of individual assets based on discounted-cash-flow techniques is an infeasible alternative. I, therefore, conclude that replacement cost (less accumulated depreciation) of similar assets producing similar services is the best practical approximation of the economic value of the assets in use. Of course, it is more appropriate for the evaluation of the division's performance than the division manager's performance."
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Solving for terminal velocity yields: V_t=((ρ_p-ρ_g)d^2 g)/(18(1.81×〖10〗^(-5) )Pa*s)
V_t=((1000 Kg⁄(m^3-1.225 Kg⁄(m^3)〖(10nm)〗^2 g)))/(18(1.81×〖10〗^(-5) )Pa*s)
The roles of economic value and replacement values are determined. The expert critically evaluates the comments.
Global Risk Management
1. What can we learn about economic development and political risk from the contrasting experiences of East and West Germany, North and South Korea, and communist China and Taiwan, Hong Kong, and Singapore?
2. What indicators would you look for in assessing the political riskiness of an investment in Eastern Europe? Assign a value and weight to each of the political risk indicators and compute an index by adding the products of the assigned ratings and weights of each political risk factor.
3. The Swiss Central Bank bans the use of Swiss francs for Eurobond issues. Explain how currency swaps can be used to enable foreign borrowers who want to raise Swiss francs through a bond issue outside of Switzerland to get around this ban.
4. What is translation exposure? Transaction exposure?
5. What are the basic translation methods? How do they differ?
6. In May 1988, Walt Disney Productions sold to Japanese investors a twenty-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6 percent (the return required by the Japanese investors), was ¥93 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 10 percent. According to Disney's chief financial officer, Gary Wilson, "In effect, we got money at a 6 percent discount rate, reinvested it at 10 percent, and hedged our royalty stream against yen fluctuations?all in one transaction."
a. At the time of the sale, the exchange rate was ¥124 = $1. What dollar amount did Disney realize from the sale of its yen proceeds?
b. Demonstrate the equivalence between Walt Disney's transaction and a currency swap. (Hint: A diagram would help.)
c. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction?
7.. Walt Disney expects to receive a Mex$16 million theatrical fee from Mexico in ninety days. The current spot rate is $0.1321/Mex$, and the ninety-day forward rate is $0.1242/Mex$.
a. What is Disney's peso transaction exposure associated with this fee?
b. If the spot rate expected in ninety days is $0.1305, what is the expected U.S. dollar value of the fee?
c. What is the hedged dollar value of the fee?
d. What factors will influence the hedging decision?