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Acct 352) Question #1) KB Distributing Inc

Finance

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The controller of KB Distributing Inc. has called you in to assist him in assessing options as to what course of action should be followed to take best advantage of the judgement.

You determine that the current 12-month forward rate for Euros is 1.55 Canadian dollars for one

Euro, while the current spot rate for Euros is 1.54 Canadian dollars. The firm's line of credit with its

Canadian bankers calls for interest of 6%, while the interest on borrowed money in Europe is 5.5%. 

The firm can invest in Canadian GIC's at 5 % and in Europe at the rate of 4.5 %. The controller tells you that he estimates the spot rate for Euros will be 1.56 Canadian dollars for one Euro twelve months from now.

Required:

a)            Advise the controller of KB Distributing Inc. as to the course of action he should follow; explain the reasoning behind your decision. Show all relevant calculations, and state any assumptions necessary.

b)            In addition to part (a), the controller has asked for your advice on how he could use options or futures to protect the receipt from the lawsuit.

Question #2) Troy has decided to sell $3 million of 10 year debentures with warrants at their $1,000 face value.  The debentures carry a coupon of 12%.  Each debenture will have attached 10 warrants, each warrant exercisable into two shares of common stock at an exercise price of $35.  Each warrant is expected to trade at a market value of $5.

Currently Troy has only one outstanding issue of straight debentures which trade to yield 14%.  These debentures will mature in 10 years and have a $1,000 face value.

The debentures with warrants issue has been priced in such a way that the initial market value of 1 debenture with warrants will equal the market value of 1 straight debenture plus the expected market value of the 10 attached warrants.

Required:

Calculate the interest payment (coupon rate) on the straight debenture which is already outstanding.