Question Details

What is the expected effective financing rate of the total amount of funds 



Kent Company is a large U.S. firm with no international business. It has two branches within the U.S.,
an eastern branch and a western branch. Each branch presently makes investing or financing decisions
independently, as if it was a separate entity. The East branch has excess cash of $15 million to invest
for the next year. It can invest its funds in Treasury bills denominated in dollars or any of four foreign
currencies. The only restriction enforced by the parent is that a maximum of $5 million can be
invested or financed in any single foreign currency.
The western branch needs to borrow $15 million over one year to support its U.S. operations. It can
borrow funds in any of these same currencies (although any foreign funds borrowed need to be
converted to dollars to finance the U.S. operations). The only restriction enforced by the parent is that
a maximum equivalent of $5 million can be borrowed in any single currency.
A large bank serving the international money market has offered Kent Company the following terms:
Currency
Annual Interest
Rate on Deposits
Annual Interest Rate
Charged on Loans
U.S. dollar 6% 9%
Australian dollar 11 14
Canadian dollar 7 10
New Zealand dollar 9 12
Japanese yen 8 11
The parent of Kent Company has created one-year forecasts of each currency (shown below) that can
be used by the branches in making their investing or financing decisions:
Currency Spot Exchange Rate
Forecasted Annual
Percentage Change
in Exchange Rates
Australian dollar $.70 -4%
Canadian dollar .80 -2
New Zealand dollar .60 +3
Japanese yen .008 0

1. Determine the investment portfolio composition for Kent- eastern branch that would maximize
the expected effective yield, while satisfying the restriction imposed by the parent.
When accounting for the interest rate and forecasted exchange rates, the expected effective yields
are listed below:
Currency
Expected Effective
Yield on Investment
U.S. dollar 6.00%
Australian dollar 6.56
Canadian dollar 4.86
New Zealand dollar 12.27
Japanese yen 8.00
2. What is the expected effective yield of the investment portfolio?
3. Based on the expected effective yield for the portfolio and the initial investment amount of $15
million, determine the annual interest to be earned on the portfolio.
4. Determine the financing portfolio composition for Kent- western branch that would minimize the
expected effective financing rate, while satisfying the restriction imposed by the parent.
When accounting for the interest rate and forecasted exchange rate, the expected effective
financing rates are listed below:
Currency
Expected Effective
Financing Rate
U.S. dollar 9.00%
Australian dollar 9.44
Canadian dollar 7.80
New Zealand dollar 15.36
Japanese yen 11.00
5. What is the expected effective financing rate of the total amount of funds borrowed?
6. Based on the expected effective financing rate for the portfolio and the total amount of $15 million
borrowed, determine the expected loan repayment amount beyond the principal borrowed.
7. When the expected interest received by the eastern branch and paid by the western branch of Kent
Company is consolidated, what is the net amount of interest received?

8. If the eastern branch and western branch worked together, the eastern branch could loan its $15
million to the western branch. Nevertheless, one could argue that the branches could not have
taken advantage of interest rate differentials or expected exchange rate effects among currencies.
Given the data provided in this example, would you have recommended that the two branches
make their short-term investment or financing decisions independently, or should the eastern
branch lend its excess cash to the western branch? Explain.



Business Management Assignment Help, Business Management Homework help, Business Management Study Help, Business Management Course Help