wrong question review

Question 1

assume that as a result of the acquisition, Hope must depreciate an additional $50 million (Hope’s share of the FMV adjustment) over a 10-year period to zero salvage value. Levitt’s contribution to Hope’s net income for 2011 is projected to be closest to:

Answer 1

Hope’s proportionate share of Levitt’s net income: $21.6 million
Less: additional depreciation expenses: $5.0 million
Equity income: $16.6 million

Question 2

In computing EVA®, which of the following adjustments made by an analyst would be appropriate?

Answer 2

R&D should be capitalized and amortized
Add LIFO reserve to total capital.
Eliminate deferred taxes and consider only cash taxes as an expense.

Question 3

Sixty days ago when the Swiss franc/euro exchange rate was SF1.12 per euro, Witkowski entered into a 1-year, quarterly settlement euro-Swiss franc swap paying €1 million at inception. The fixed-for-fixed swap had the franc fixed rate at 0.96% and the euro fixed rate at 0.78%. Currently, the euro position has a value of €1.0014 per €1 notional and the exchange rate is SF 1.10 per euro. Exhibit 1 provides information about Swiss interest rates.

Exhibit 1: Swiss Interest Rates
Term	Rate	DF
30	0.50%	0.9996
60	0.54%	0.9991
90	0.48%	0.9988
120	0.65%	0.9978
180	0.77%	0.9962
210	0.67%	0.9961
300	0.82%	0.9932
360	1%	0.9901

Answer 3

1. get two currency NA amount
   €1,000,000
   €1,000,000 * 1.12/Euro = SF 1,120,000
2. pay:
   Sixty days after initiation 360-60=300
   quarterly settlement
   , the remaining settlement days are 30, 120, 210, and 300 days into the future.

NA_sf * (r_sf/4 *(sum DF) + 1 * df_f) * Spot_new
=SF 1,120,000 * (0.0096 / 4) × (0.9996 + 0.9978 + 0.9961 + 0.9932) + 1 × 0.9932
/ 1.10
=€1,021,033.

3. receive:
   Currency Euro position value = Spot * NA
   The euro position value is given as €1.0014 per €1 notional. For €1 million notional, this translates into a value of €1,001,400.
4. Calculate the difference

€1,001,400 − €1,021,033 = –€19,633

Because Witkowski’s client paid the euro notional at initiation, they will receive the euros and have a value of €1,001,400 − €1,021,033 = –€19,633.

Question 4

Calculate the present value of the dollar fixed payments for the 2-year currency swap six months after Torrey’s initial analysis.

Answer 4

The fixed dollar payment under the swap using the original yield curve is computed as:

Z360 = 1 / [1 + 0.040(360 / 360)] = 0.9615

Z720 = 1 / [1 + 0.045(720 / 360)] = 0.9174

The annual fixed payment per dollar of notional principal would then be:

FS(0,2,360) = (1 − 0.9174) / (0.9615 + 0.9174) = 0.044

The annual fixed payment would be:

0.044 × $100M = $4.4 million

Using the new U.S. term structure to derive the present value factors:

Z180(360) = 1 / [1 + 0.042(180 / 360)] = 0.9794

Z180(720) = 1 / [1 + 0.048(540 / 360)] = 0.9328

The present value of the fixed payments plus the $100M principal is:

$4.4M × (0.9794 + 0.9328) + $100M × 0.9328 = $101.69 million