Corporate finance exam /AN

Question 1
The current price of a US dollar (USD) is 6.79 Danish kroner (DKK). The 1-year risk-free
interest rates are 3% for the US and 1% for Denmark.
a) What is the price of 1 DKK in USD?
b) What is the forward rate (DKK pr. USD) assuming the interest rate parity holds?
c) Is the US dollar trading at a forward premium or a forward discount?
d) Assume that you are a Danish investor and you do NOT believe the expectations
hypothesis. Instead you think that the DKK/USD exchange rate will be the same 1
year from now (i.e. 6.79 DKK pr. USD). You wish to trade on your conviction, but
cannot trade forward contracts. What trading strategy would you pursue to profit from
your beliefs? (You are interested in DKK profits.)
e) Assume you followed your strategy above. How much would you have made on a
1000 DKK trade if the exchange rate turned out to be 6.00 DKK pr. USD? Explain
why the trade made a profit or a loss.
Question 2
A US jewelry company is currently generating a free cash flow of $5m. per year selling gold
rings. The company expects this will continue forever if they make no changes to their
business model. Their WACC is 10%.
a) What is the value of the company?
b) The company is considering a marketing strategy which will make their free cash
flow grow by 2% every year from next year and forever thereafter (i.e. they will earn
$5.0 m. next year, $5.1 m. in year 2, $5.202m in year 3, and so on). How much should
the company be willing to pay for this marketing strategy?
c) The marketing strategy will cost the company $1m. What is the minimum growth rate
(of free cash flows) the marketing strategy must generate in order to be worthwhile?
d) The company is worried that the price of gold might increase and eat away the
profitability of their business model. Discuss how the company might hedge this risk,
without having to buy and store gold directly. (5-10 lines)
Question 3
For each figure below, what portfolio of call options, put options and stocks would replicate
the payoff diagram depicted. State the number of call options, put options and stocks along
with their exercise prices. Assume that all options expire on the same date, and that the stock,
which can be included in the portfolio, is the underlying asset for the options. (Hint: You will
need three assets for question b))

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