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1)PQR Co has a monthy demand 7500 unit.Unit cost $5,Co $100, Ch 10% of purchase price per year.
Lead time is 30 days.
If they order the EOQ each time,how frequently will they place an order?2)The current spot rate for the US dollar against UK pound is $/pound 1.3821-1.3925 and the 3 mth forward rate is /pound 1.3832-1.4001.
A UK importer expects to have to pay &800,000 in 3 mth time.
If he uses the forward markt,how much foes he expect to pay in UK pound?3)AJT Co has a gearing ratio(debt : (equity+debt)) of 30% and pays tax 25%.AJT has an asset(ungeared) beta of 1.2.The Rf is 5% and Rm is 12&.
What is the Ke of AJT?1. EOQ = square root of (( 2 x 12 x 7500 x 100) / (10% x 5) = 6,000 units
Total demand = 12 x 7500 = 90,000 units.
If they order 6,000 each time, then they will order 90,000/6,000 = 15 times a year.
So they will order every 365 / 15 = 24.33 days2. 800,000 / 1.3832 = GBP 578,369
Our free lecture on foreign exchange risk management will help you with this.
3.
Using the asset beta formula:
1.2 = ((70 / (70 + (30 x 0.75)) x beta equity
1.2 = 0.75676 x beta equity
beta equity = 1.2 / 0.75676 = 1.586Cost of equity = 5% + 1.586 x (12% – 5%) = 16.10%
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