MSc Finance : Assignment title: Cartmel Enterprises Task 1 Calculations Task 2 Report

Requirements
Task 1 Calculations (30%) (this part i sent you a sample work)
Using the information provided about the transaction and the exchange rate information in Appendix A:
(a) Calculate the potential cross rate that could be used as a substitute official rate for the Sierra Nuevo peso/ and the potential unofficial exchange rate that may be available for the receipt of Sierra Nuevo pesos;
(b) Calculate the expected futures price as at 1 November;
(c) Calculate the outcomes from each of the forms of currency hedge that are available to Cartmel Enterprises:
(i) Forward rate agreement
(ii) Futures
(iii) Options
Note:
You should assume that on 1 November the spot rate is $/ 1.6528.
Task 2 Report (65%)
Write a report for the Board of Cartmel Enterprises. Your report should:
(a) Outline two risks, other than currency risk, that may arise from trading with ZZ Hotels and suggest ways to manage these (indicative word count = 400);
(b) Briefly explain how the Black-Scholes (BS) model may be modified to calculate the price of a currency option (no calculations are required) (indicative word count = 250);
(c) Briefly explain two theories that may be used to calculate future exchange rates (indicative word count = 450)
(d) Using your calculations from Task 1, critically evaluate the alternative forms of currency hedge that are available to Cartmel Enterprises and identify the expected revenues, in sterling, from the sale to the company in Sierra Nuevo as a result of each of these hedges (indicative word count = 750);
(e) Provide a reasoned recommendation as to which hedge should be selected (indicative word count = 300).
The remaining 5% will be given for the layout, structure and referencing within your report.

Year: 0 1 2 3 4 5 Inflation

Revenue   0   12,978,000    15,807,410    19,996,904    15,419,471    0       0.03
Fixed Cost   0   -2,244,000    -2,288,880    -2,334,658    -2,381,351            0.02
Variable Cost   0   -7,176,000    -8,760,960    -11,473,613    -9,124,897    0       0.04
Cash Flow   0   3,558,000    4,757,570    6,188,634    3,913,223    0
Taxation   0   0   -711,600    -951,514    -1,237,727    -782,645
Less: Taxation on capital allowances   0   0   375,000    281,250    210,938    632,813
After tax cash flow   0   3,558,000    4,420,970    5,518,370    2,886,434    -149,832
Initial Investment   -7,500,000    0   0   0   0   0
Net Cash Flow   -7,500,000    3,558,000    4,420,970    5,518,370    2,886,434    -149,832
Discount Factor   1   0.9201   0.8466   0.7790   0.7168   0.6596   0.0868   (WACC)
Present Value   -7,500,000    3,273,831    3,742,987    4,298,945    2,069,012    -98,823
Net Present Value                           5,785,953

Capital allowances
7,500,000                NPV=    5,785,953
0.25   -1,875,000    375,000            IRR=    40.28%
5,625,000                MIRR=    21.71%
-1,406,250    281,250
4,218,750                Paybcky period=    1.89
-1,054,688    210,938            7,500,000
3,164,063    632,813            -3,558,000
3,942,000

Discounted payback period= 2.11
7,500,000
-3,273,831
4,226,169
-3,742,987
483,182

ARR on average investment=   72.78%
ARR on total investment=   36.39%
Total before tax cash flow    18,417,427
less depreciation   -7,500,000
10,917,427
Average profit before tax=    2,729,357
Average investment=    3,750,000

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