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Changes in exchange rates, and foreign investment analysis

1. Results of exchange rate changes: Early in September 1983, it took 245 Japanese yen to equal $1. Nearly 22 years later, in July 2005 that exchange rate had fallen to 111 yen to $1. Assume the price of a Japanese-manufactured automobile was $9,000 in September 1983 and that its price changes were in direct relation to exchange rates.

a. Has the price, in dollars, of the automobile increased or decreased during the 22-year period because of changes in the exchange rate?
b. What would the dollar price of the automobile be in July 2005, again assuming that the car's price changes only with exchange rates?

2. Foreign investment analysis: After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $1.60 per pound, and the pound is expected to depreciate 5 percent against the dollar each year for an indefinite period. The dividend (in pounds) is expected to grow at 10 percent a year indefinitely. The parent U.S. Corporation owns 10 million shares of the subsidiary?

a) What is the present value in dollars of its equity ownership of the subsidiary? Assume a cost of equity capital of 15 percent for the subsidiary.

PLEASE USE EXCEL AND SHOW ALL CALCULATIONS AND GIVE EXPLANATIONS/ANALYSIS.

Solution Preview

1. Results of exchange rate changes:

Early in September 1983, it took 245 Japanese yen to equal $1.
Nearly 22 years later, in July 2005 that exchange rate had fallen to 111 yen to $1.
Assume the price of a Japanese-manufactured automobile was $9,000 in September 1983 and that its price changes were in direct relation to exchange rates.

a. Has the price, in dollars, of the automobile increased or decreased during the 22-year period because of changes in the exchange rate?

September 1983 exchange rate = ¥245 /$
July 2005 exchange rate= ¥111 /$

The price of the automobile has increased as in 1983, $1 could buy 245 yens for paying for the automobile but in 2005, $ 1 can now buy only 111 ...

Solution Summary

Problems related to changes in exchange rates, and foreign investment analysis have been answered.

$2.19