Tutorial Questions

Tutorial 1 Assumed knowledge and basic principles

Questions are to be attempted prior to attending the tutorial


1. List some reasons why a basic understanding of finance principles is important to you.


2. Classify each of the following items into one of the five categories: Asset, Liability, Equity, Revenue,
or Expense. Do these items appear on the Income Statement or on the Balance Sheet?

Item Account category Statement category
Motor vehicle Asset Balance Sheet
Interest expense Expense Income Statement
Rent received Revenue Income Statement
Bank overdraft Liability Balance Sheet
Retained profits Equity Balance Sheet
Trade Payables Liability Balance Sheet
Stock on Hand Asset Balance Sheet
Cash Asset Balance Sheet
Brand names Asset Balance Sheet
Dividend paid N/A N/A

3. a) What is depreciation?
Non-cash expense that represents an allocation of a non-current assets cost over its life
b) Where does depreciation appear on the balance sheet?
An expense on the Income Statement, Accumulated Depreciation as Offset on Balance Sheet
c) Machinery costing $100,000 is being depreciated over 10 years.
i. What is the machinerys book value (or written down value) after 3 years? 70000
ii. If the machinery is sold for $35,250 after 6 years is there a gain or a loss on disposal?
Loss of supposed value of 40000, (-4750)
4. a) What is working capital and net working capital? Working Cap. = Firms current asset & liabilities.
Net Working Capital = Current Assets Current Liabilities
b) Given the following information, calculate net working capital:
Total equity = $2.7m
Total assets = $8.4m
Total non-current liabilities = $2.2m
Current assets = $1.1m

5. Calculate EPS (Earnings per Share) given the following information:
EBIT = $530,000
Sales = $1,120,000
Tax rate = 30%
Number of shares outstanding = 530,000
Interest expense= $100,000
EPS = [(EBIT Interest)(1 tax rate)] / number of shares

6. Explain what is meant by a tax deduction.
Cost that is incurred in the generation of income and is allowed as a tax deduction. These costs reduce the
firms profits and therefore reduce the amount of tax payable.






Tutorial Questions
Tutorial 2 Introduction
Questions are to be attempted prior to attending the tutorial

1. Maximising profits is a more appropriate goal for a financial manager than maximising
shareholder wealth. True or False? Explain. False, maximising shareholder wealth through
share price. Profit is not the goal because it ignores cash flow, timing and risk.

2. a) Buying shares listed on the Australian Securities Exchange (ASX) is a primary market
transaction. True or False? Explain. ASX = 2ndary, Primary = Buying directly from company
b) Primary market transactions are helped by good secondary markets. True or False?
Explain. Active 2ndary market provides liquidity (an investor value).

3. The directors of Alps Ski Company have just rejected a takeover offer for the company
saying the offer price of $4.50 a share is too low. The current share price is $3.15 and the
share price has never been above $4.00. Whose interest are the directors acting in? What
are some of the ethical issues associated with this rejection? Acting in their own interest,
RESIST: if they believe firm is > 4.50, ACCEPT: offer if value is not increased.

4. Which is more important and why - the investment decision or the financing decision? Which
part of the balance sheet does each decision affect? Give two examples of each decision.
Investment decision determines the composition of assets controlled by the firm.
Financing decision is concerned with debt (liabilities) and owners equity.
Investment Decision is more important, as it determines REAL assets that a firm requires.

5. Suppose a firm has had negative cash flow for each of the past three years but positive net
profit. Does this indicate a problem? What if cash flow is positive and net profit is negative?
Yes, continued cash flow = more cash going out than in, Insolvency (assets < debt)
Cash Flow +, Profit - = No problems, still meeting requirements
6. What is the primary disadvantage of the corporate form of organisation? Name at least two of
the advantages of corporate organisation.
ADV: Limited liability, Ease of transferability, Capital Raising, Unlimited Life
DISAD: Cost & Complexity of establishment, Agency Problems
7. As a financial manager, discuss the factors your business would have to consider to help
decide between the following two investments:

$1 million investment in a copper mine that is forecast to be valued at $5 million in five
years time.
$1 million investment in a five-year government bond.

Tutorial Questions
Tutorial 3 Time Value of Money 1
Questions are to be attempted prior to attending the tutorial

1. Explain the difference between an annual percentage rate (APR or nominal rate) and an
effective rate.
APR is a rate compounded more frequently than annually (daily, monthly, and half-yearly)
EFF, EAR or effective rate is compounded annually.
2. In 2011, a mechanized toy robot from the television series Lost in Space sold for $750. This
represented a 13.86 percent annual return. For this to be true, what must the robot have sold
for new in 1975?
3. Wilma borrows $250,000 for 150 days. How much interest will she have to pay if the interest
rate is?

(a) 8% pa simple interest INT = PV * I
s
* n = 250,000 * 0.08 * 150/365 = 8219.18
(b) 8% pa compounding daily FV = PV(1 + i)
n
= 250000 (1 + 0.08/365)
150
= 258,354.85
INT = FV PV = 258,354.85 - 250,000 = 8354.85

4. You have just made your first $1,500 contribution to your individual superannuation
retirement account. Assuming you earn a 9.5 percent rate of return and make no additional
contributions, what will your account be worth when you retire in 40 years? What if you wait
12 years before contributing? (Does this suggest an investment strategy?)
FV = PV(1 + i)

= 1500(1.095)
40
= 56579.10 | FV = 1500(1.095)
12
= 19040.86

5. You have been offered the following cash flow choices.

(i) $2,000 immediately, or
(ii) $1,200 immediately followed by $900 at the end of the year.

Which is the better choice if TVM are 15.5% pa?
PV = 1200 + 900(1+0.155)
-1
= 1979.22

6. The outstanding debt on a credit card is charged at an interest rate of 0.85% per month.
What is the effective interest rate? EAR = (1 + i)
m
1 = (1 + 0.0085)
12
1 = 10.69%

7. You invested $17,000 in a superannuation fund in 2006. If you withdraw $18,000 from the
fund in 2011, how much will be in the fund in 2015? The fund earns a constant return of 7.6%
pa. FV = PV(1 + i)
n
= 17000(1.076)
5
= 24,519.42
Balance in 2011 = 24519.42 18000 = 6519.42 | 2015 FV = 6519.42(1.076)
4
= 8738.93

8. You have been invited to invest in a new wealth management plan. It will cost you $10,000
today to buy in and the projected cash returns are $8,000 five years from now and $12,500
eleven years from now.
a) Is this wealth management plan worthwhile if you think money is worth 8%pa to you?
b) Does your answer change if money is worth 12.5%pa due to the risk of the plan?

Tutorial Questions
Tutorial 4 Time Value of Money 2
Questions are to be attempted prior to attending the tutorial

1. Explain the difference between an annuity and a perpetuity.
Annuity: Finite number of equal-sized amounts that occur at equal-spaced intervals
Perpetuity: Infinite number of equal-sized amounts that occur at equal-spaced intervals

2. The future value of an ordinary annuity is calculated one period before the final payment.
True or False? Explain. F.V. is calculated at the same time as the final payment

3. Beginning three months from now, you want to be able to withdraw $375 each month from
your bank account to cover university expenses over the next three years. If the account
pays 0.125 percent interest per month, how much do you need to have in your bank account
today to meet your expense needs over the next three years?


4. Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $2,650 monthly
forever. The contract currently sells for $260,000. What is the monthly return on this
investment? What is the APR? What is the effective annual return?
PV = PMT / I
260000 = 2650 / i
I = 0.0101923 = 1.019% per month

5. What is the present value of $2,750 per year, at a discount rate of 11.25%, if the first
payment is received 6 years from now and the last payment is received 26 years from now?

6. Prepare an amortisation schedule for a three-year loan of $60,000. The interest rate is
11%per year, and the loan calls for equal annual payments. How much interest is paid in the
third year? How much total interest is paid over the life of the loan?

7. You want to by a new car that will cost $45,500. The car dealers finance company will lend
you the money at 18%pa compounded monthly over four years. To reduce the amount of the
loan repayments they have suggested you make a special payment at the end of the loan of
$15,000 (the projected trade in value of the car in four years time). This $15,000 payment is
instead of the monthly loan payments. What is the amount of the 47 regular monthly loan
repayments on this 4 year loan? (Do not forget to account for the $15,000 repayment in
period 48)

APR = 12 x 1.019 = 12.23%
EAR = [1 + i]
m
1 = [1 + 0.01019]
12
-1 =12.94%

8. You have been asked to prepare a retirement plan for your parents. They want to be able to
spend in their retirement $47,000 a year for 35 years once they retire in 2026. They have
$77,500 in their superannuation fund today in 2013. How much will they need to add to their
superannuation fund on a yearly basis, starting at the end of this year (2014) and finishing in
2026 when they retire? The first payment from the fund of $47,000 will be at the end of 2027.
The superannuation fund earns 8.5%pa.



Tutorial Questions
Tutorial 5 Debt and Valuation
Questions are to be attempted prior to attending the tutorial

1. Is the yield to maturity on a bond the same thing as the required return? Is YTM the same
thing as the coupon rate? Suppose today an 8 percent coupon bond sells at par. Two years
from now, the required return on the same bond is 7 percent. What is the coupon rate on
the bond now? The YTM? Yes, they are interchangeable terms. Can also be Market
Yield/Rate. YTM however is NOT coupon rate, as coupon rate is a fixed percent of face
value used to determine the coupon payment. YTM is market rate used to price bonds

2. Explain what is meant by secured debt. Debt where the borrower is required to offer
security to the lender usually in the form of an asset, Reduce risk to lender i.e. mortgage

3. Which of the following offers no protection for a firms lenders?

(a) a floating charge security is a pool of changing assets i.e. inventory
(b) a debt-ratio limit of 0.65 an example of a covenant
(c) a floating rate loan
(d) a covenant feature of a loan agreement where they agree to DO or NOT DO x or y
(e) a fixed charge security in a specific asset

4. Whale Wash Limited issued 15-year bonds five
years ago at a coupon rate of 6.25 percent. The
bonds have a face value of $250,000 and make
semiannual payments. If the YTM on these bonds
is 7.46 percent, what is the current bond price?








5. Merton Enterprises has bonds on the market
making annual payments, with 13 years to
maturity, and selling for $905. At this price, the
bonds yield 8.5 percent. What must the coupon
rate be on Mertons bonds given a face value of
$1,000?


6. Imam Needy requires approximately $250,000 for
180 days. A bank is prepared to provide finance
in the form of 90 day bank bills with a face value
of $250,000. If the current 90-day bank bill rate is
6.6% pa and the rate in 90 days' time is 7.15%
pa, what are the cash inflows and outflows for
Imam Needy after each 90 day periods?


7. In question 6 above assume Imam Needy has a
cash windfall and wants to buy back the first bill
after 40 days have elapsed at the current market
rate. Current bank bill rates are 180 days 7.75%;
90 days 7.5%; 50 days 7% and 40 days 6.9%.
a) What rate should Imam Needy use to price the
bill? Use the 50 day rate (7%) as there are 50 days until maturity
b) What would be the price Imam Needy has to pay to buy the bill?


8. On April 1st 2012 Health Works Limited issued a bond with a maturity date of 1st April
2024. One Health Works bond has a face value of $200,000 and the coupon rate is 4.65%
p.a. The bond pays half-yearly interest and are currently trading in the market at a YTM of
6.25% p.a. What is the market price of the bond if today is 1st October 2013? What is the
bond price five years before maturity? On the maturity date?

Tutorial Questions
Tutorial 6 Equity and Valuation
Questions are to be attempted prior to attending the tutorial

1. A number of the companies listed on the ASX and the NZX do not pay dividends, but
investors are nonetheless willing to buy shares in them. How is this possible?
Investors believe company will eventually start paying dividends + return on investment
2. Golden Wheat Ltd. just paid a dividend of $1.20 per share. The dividends are expected to
grow at a constant rate of 4.5 percent per year, indefinitely. If investors require a 13 percent
return on Golden Wheat shares, what is the current price? What will the price be in four
years? In 10 years? Current Price = 14.75 | Price (4) = 17.59 | Price (10) = 22.91

3. Auckland Ltd. is growing quickly. Dividends are expected to grow at a 20% rate for the next
two years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required
return is 13 percent and the company just paid a $0.50 dividend, what is the current share
price? Hint: Calculate the first three dividends. Current Price = 0.6(1.13)
-1
+0.72(1.13)
-2
+

4. E-tr@kker is a company that offers the ability to track the movements of cars (and soon,
people) via the Internet, recently floated and listed on the ASX at a spectacular premium to
the $1 issue price, however the share price is under pressure because of a stream of
competitors entering the market. They have yet to make a profit because of their heavy
investment program. They are deciding which funding source to use to raise finance for a hi-
tech digital investment that will last for one year. They currently have a debt-equity ratio of
1.25 and their trust deed limit is 1.30. Which of the following financial claims would be most
suitable? Why?

non-voting redeemable preference shares
a revolving 90 day bank bill facility
rights issue of ordinary shares to be listed on the ASX
a current ratio of 2.5
10 year floating rate loan from Westpac
Private placement of ordinary shares to AMP

5. Data-Dot Limiteds current share price is $10.20. They have decided to have a rights issue to
raise $40 million for a new investment project. The subscription price is $8 per share and
existing shareholders are offered one new share for every five they currently own.

(a) How many new shares need to be issued?
(b) What is the theoretical value of the rights?
(c) What is the ex-rights price most likely to be?

Tutorial Questions
Tutorial 7 Capital Budgeting 1
Questions are to be attempted prior to attending the tutorial

1. What is capital rationing? Deciding on what investment opportunities to pull. Soft =
management imposed. Hard = imposed by market and lenders

2. Consider the following cash flows for a new business investment.

Year 0 Year 1 Year 2 Year 3
Project cash flows -1,200 415 490 660

(a) Calculate NPV, IRR and payback period assuming a 25% discount rate.
NPV = -216.48, IRR = +13.38 Payback Period = 2 + 295/660 = 2.447
(b) For what range of discount rates is the project acceptable? Illustrate your answer with
an NPV profile. What happens when the discount rate is zero and infinite?

3. A company is considering investing in one of two projects. The projects, known as Kimberly
and Clark, each cost $4,000 today and have the following cash flows.

Year Project Kimberly Project Clark
1 $0 $1,120
2 $0 $1,120
3 $0 $1,120
4 $0 $1,120
5 $0 $1,120
6 $8,800 $1,120

(a) If the required return on both projects is 9.5%, what is the PI and the NPV for each
project?
PK NPV = 1105.026 | PC NPV = 950.204
PK PI = 1.276 | PC PI = 1.238

(b) What is the payback period for each project? Is the payback period a sensible method to
evaluate a project like Kimberly?
PK PB = 5.45 | PC PB = 3.57

4. SMS Ltd is listed on the ASX and has 5,000 shares outstanding that are currently trading at
$20 each. It is an all equity firm. SMS has four independent business ventures under
consideration, all with a risk level requiring a return of 10% pa.

IRR NPV @ 10%
Venture W 8.3% -$3,456
Venture X 16.9% $7,300
Venture Y 14.7% $1,400
Venture Z 19.3% $6,500

(a) Which is the best business venture and why? X
(b) What is the effect on share price if all valuable ventures are accepted?
= (5000 x 20) + 7300 + 1400 + 6500 = 115200 = 115200/5000 = 23.04 new price
5. The internal rate of return is the same thing as the discount rate. Is this statement true or
false? Explain. False, IRR is the rate that results in 0 NPV when used as discount rate,
discount rate is required rate of return for a project.
Tutorial Questions
Tutorial 8 Capital Budgeting 2
Questions are to be attempted prior to attending the tutorial

1. Depreciation is not a cash flow item so it can be totally ignored in a capital budgeting
analysis. True or False? Explain.

2. Reginald, a sole proprietor, is deciding whether to replace an old JCB excavator with a new
one costing $60,000. The old excavator has a current book value of $12,000 and can be sold
for $5,000 to a scrap metal dealer today. The cash operating costs of the old excavator are
$20,000 a year. The new, more efficient, excavator has annual operating costs of only
$8,000. The old excavator is being depreciated at $4,000 a year and has a remaining life of
three years at which time its scrap value will be zero. The new excavator is depreciated on a
straight-line basis over a three year life and can be sold for $5,000 at that time.
If Reginald is in the 40% tax bracket and the discount rate is 11.5%, should he buy the new
JCB excavator?

3. TSX Ltd paid $10,000 two months ago for a feasibility study of a new metal-shaping
machine. Today, they wish to conduct an analysis of the proposed new machine. The
machine costs $180,000 and will operate for five years. TSX will borrow $100,000 to help pay
for it. The machine has a four year life for depreciation purposes and is expected to produce
$150,000 cash flow annually over five years. TSX have already agreed to sell the machine in
five years time to an unrelated firm for $40,000. The machine requires an $85,000 increase
in accounts receivable and a reduction in inventory of $20,000 from current levels will also
occur. Loan repayments on the interest-only loan are $16,000 each year for five years. If
TSX buy the machine they will be able to use some equipment that they currently own.
Management is excited because they dont have to buy this equipment so they can save
more. The equipment was bought for $100,000 six years ago and could be sold today for
$40,000. This equipment has been written off for tax purposes and would be worthless in five
years time. If the company tax rate is 30% and the appropriate discount rate is 17.5%,
should TSX buy the new machine?

4. All Coal Mines Ltd, (ACM) a mining company is constructing a town at Emerald a remote
area in Queensland where it is building a coal mine. The town will be abandoned when the
coal has been fully extracted from the mine which is estimated to be in ten years time.
Management of ACM have been given the following estimates that relate to the provision of
general services, food and provisions for the company town at Emerald over the ten year
period of the mine.
i) Purchase of land $500,000, cost of portable buildings $100,000 and purchase equipment
$200,000. The land is expected to be able to be sold in ten years time at a value of
$250,000. The buildings can be sold for $25,000 in ten years, but the equipment will
have no value in ten years time.
ii) Management of ACM depreciates all assets over a ten year life span the same as the
project. The taxation office has provided advice to ACM that the buildings are
depreciated for tax purposes over 20 years straight line and equipment at ten years
straight line. Land cannot be depreciated for tax purposes, and in this case there are no
tax effects from gains or losses on land.
iii) The project will require an investment in inventory of $125,000 at the start of the project.
iv) The annual cash sales are estimated to be $1,450,000 and cash operating costs are
estimated to be $1,050,000
Will the project prove profitable for All Coal Mines Limited given that the required rate of
return is 15% pa. and the company tax rate is 30%?
Tutorial Questions
Tutorial 9 Risk and Return
Questions are to be attempted prior to attending the tutorial

1. What is the SML? Draw a graph of the SML and be sure to label all axes.

2. Your friend has been successfully engaging in day-trading ASX securities and has made a profit of
243% in the last six months. Does your friends performance indicate a market inefficiency?

3. Consider the following information:
State of
Economy
Probability of
State of Economy
Share A
Rate of Return
Share B
Rate of Return
Share C
Rate of Return
Boom .60 .14 .18 .26
Bust .40 .08 .02 .02
(a) What is the expected return on an equally weighted portfolio of these three shares?
(b) Calculate the variance of this portfolio.


4. Consider a portfolio with the following statistics. Assume the shares are priced in equilibrium and the
government bond rate is 8% pa.
Share Amount invested Expected return Beta
X $8,000 11% 0.5
Y $12,000 17% 1.5

(a) What is the expected return on this portfolio?
(b) What is the risk of this portfolio?
(c) What is the equation of the SML?
(d) Share Z is priced in such a way that it will yield an expected return of 15%. It has a beta of 1.2.
Is Share Z overpriced, underpriced or fairly priced?

5. You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Given
this information, fill in the rest of the following table:
Asset Investment Beta
Share A $120,000 .90
Share B 130,000 1.20
Share C 1.60
Risk-free asset

6. When an investor holds a fully diversified portfolio they have eliminated all risk. True or False?
Explain your answer.

7. A share has an expected return of 16 percent, its beta is 1.2, and the risk-free rate is 5 percent. What
must the expected return on the market be?
Tutorial Questions
Tutorial 10 Cost of Capital
Questions are to be attempted prior to attending the tutorial

1. On the most basic level, if a firms WACC is 10 percent, what does this mean?

2. When calculating the WACC, the required return for each type of capital should be multiplied
by (1 t
c
). True or False? Explain.

3. Rooster Bushware Limited has 8 million ordinary shares outstanding. The current share price
is $24, and the book value per share is $4. Rooster also has two bond issues
outstanding. The first bond issue has a face value of $18 million, has an 7.5 percent
coupon, and sells for 105 percent of par. The second issue has a face value of $15 million,
has a 6.25 percent coupon, and sells for 103 percent of par. The first issue matures in 10
years, the second in 6 years.
(a) What are Roosters capital structure weights on a book value basis?
(b) What are Roosters capital structure weights on a market value basis?
(c) Which are more relevant, the book or market value weights? Why?

4. Target Sails Limited (TSL) wants you to estimate its WACC. TSL has a policy of financing all
its assets with 35% debt 15% preference shares and the balance equity. TSL has been
advised that a new bank loan would cost 9.5%. TSL preference shares have a market yield
of 10% and the ordinary shares have a market price of $3.20, they just paid a dividend of
$0.45 and this dividend has been growing at 3% a year. If TSL tax rate is 30% what is their
WACC?

5. Fastrack Ltd. is a transportation company wanting to know if they should proceed with a
particular investment. They have extracted some information from their balance sheet and
also provided some other relevant data. The figures reflect their target capital structure. The
tax rate is 30%. Calculate the WACC given the following information.
Corporate bonds of $2m (face value $100 each and 10% pa coupon, paid annually,
issued 6 years ago and maturing in 4 years). Yield to maturity is 11% pa.
Non-redeemable preference shares of $1m (preference dividend 15% pa of $1 issue
price, paid annually in arrears). The preference shares are currently trading at $1.25.
Ordinary shares of $2m (issue price $2 each ordinary share). Next year's dividend is
expected to be $0.50. The current price implicitly implies a dividend growth rate of 6%
pa indefinitely. The current return on the market is 15% and the market risk premium is
6%. Fastrack's beta is 1.2.

6. What is forecasting risk? In general, would the degree of forecasting risk be greater for a
new product or a cost-cutting proposal? Why?


Tutorial Questions
Tutorial 11 Capital Structure and Foreign Exchange
Questions are to be attempted prior to attending the tutorial

1. The tax savings attained by a firm because of the tax deductibility of the interest expense is
called the:
(a) static theory.
(b) weighted average cost of capital.
(c) after-tax net profit.
(d) interest tax shield.
(e) M&M Proposition I savings.

2. What is a target capital structure?

3. (a) Why is firm value maximised somewhere between the extremes of 0% debt and 100%
debt?
(b) Why is the use of debt financing referred to as using financial leverage?

4. We Mine Copper (WMC) is proposing to change its capital structure and has asked you for
some advice. WMC currently finances its assets with $2,000,000 of debt that has a fixed 8
percent interest rate each year. The market value of the firm's equity is $3,000,000 based on
the current 75,000 shares outstanding.
WMCs proposed capital structure consists of issuing $1,000,000 of equity at the current
market price and using the proceeds to repay debt. The company tax rate is 30%.
(a) What is the breakeven EBIT?
(b) Graph the two capital structures in the EBIT-EPS plane.
(c) If WMC expects a maximum EBIT figure of $350,000, then which capital structure
would you advise?

5. Delta Ten Limited (DTL) is a new company and management are trying to decide on a
financing structure. The first option DTL is considering is all equity financed firm, DTL would
issue 4,000,000 at $3.00 par value shares on issue. The second option is funding 30% of
the firm with debt and the balance with ordinary shares at an issue price of $3 per share. DTL
has been advised that the cost of debt finance would be 15%pa due to its relative risk and
they will be paying tax at the 30% company tax rate.
a) how many shares will be issued under each option?
b) What is the breakeven EBIT?
c) If DTL expect EBIT to be$750,000 what option would you recommend to Delta Ten
Limiteds management?

6. The current exchange rate is Australian Japanese exchange rate is AUD/JPY 80. The current
risk free rate of return in Australia is 5% p.a. and in Japan is 2% p.a., what would expect to
happen to the AUD/JPY exchange rate?

7. You see that todays exchange rate is AUD/USD = 0.9346. You know for certain that
tomorrows rate will be AUD/USD = 0.9452. You are considering converting AUD$1,000 into
USD. Which of the following statements is true?

(a) The AUD will depreciate, so converting tomorrow will make you A$10.60 worse off
than if you converted today.
(b) The AUD will appreciate, so converting today will make you A$10.60 better off.
(c) The AUD will depreciate, so converting today will make you US$10.60 better off.
(d) The AUD will appreciate, so converting tomorrow will make you US$10.60 better off.
(e) The AUD will appreciate, so converting tomorrow will make you A$10.60 worse off.

8. An ounce of gold can be purchased in New York for US$1265.95. An ounce of gold in
Sydney is trading at A$1427.35. The AUD/USD exchange rate is US$0.9427. What would
you do? What other factors must you consider before you act? What if instead of gold the
item was a share in News Corporation?

9. An importer of Chinese Widgets orders 25,000 from their supplier at a cost of 12 Chinese
Yuan per Widgets. The order is placed today, but payment is made 90 days later. The selling
price is A$3.50 per Widget. The exchange rate is currently A$1 = Chinese Yuan 6.5419 and
this rate can be locked-in today. What is the profit based on the current exchange rate? If
the exchange rate was not locked in and the $A dropped to A$1 = Chinese Yuan 5.6414 in
90 days, what is the profit?