1. Pretoza Inc. has accounts payable of 367,000 euros (EUR) due in 4 months....
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1.
Pretoza Inc. has accounts payable of 367,000 euros (EUR) due in 4 months. The spot rate for euro is 1.8638 US dollars and the forward rate for euro in 4 months is 2.1205 US dollars. The European call option on the euro with the same expiration date as the payable has a strike price of USD 2.1933 and a premium of USD 0.07. In the same vein, a put option on the euro with a strike price of 2.2093 has a premium of 0.17. The company prefers to hedge its transaction exposure using financial instruments that provide flexibility. Assume that on the due date of the account payable, the spot rate is USD 2.0216/EUR. The net amount paid in USD by the company if it acts rationally would be:
a.767,617
b.741,927
c.803,913
d.735,431
2. Doctor strange Inc. is a public company listed on NASDAQ. The annual report reveals that the company has a bank loan of 10,000,000 dollars with an interest rate of 12%. The market value of the company's equity is 18,000,000 dollars. The beta of the company is 1.05 and the market return is 11% per annum. The risk-free rate in the United States is 3% p.a. while the relevant tax rate for Doctor strange Inc. is 29%. Find the weighted average cost of capital (WACC) of Doctor strange Inc.
a.10.37%
b.10.61%
c.11.61%
d.11.79%
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