College Finance Level 1 Please show your work 3. Megahurtz International Car Ren

Question

College Finance Level 1

Please show your work

3. Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It keeps funds for transaction purposes in many foreign currencies. Assume that in 2015 it held 320,000 reals in Brazil worth 250,000 dollars. It earned 13 percent interest, but the real declined 26 percent against the dollar. a. What is the value of its holdings, based on Canadian dollars, at year end? Value of the holdings b. What is the value of its holdings, based on Canadian dollars, at year end if it earned 10 percent and the real went up by 14 percent against the dollar? Value of the holdings

Explanation / Answer

a) First of all lets find exchange rate between real and canagian dollar

In 2015

320,000 Real = 250,000 CAD

1CAD = 320,000/250,000 Real

1 CAD = 1.28 Real

Now During 2015,megahurtz international earned 13% interest

Total amount at end of year = 320,000 + (320,000 * 13%)

=320,000 + 41,600

=361,600 Real

However real declined 26% against dollar, that means that the real has become weak and CAD strong

Begining of year = 1CAD = 1.28 Real

At end of year = 1CAD = 1.28 +(1.28*26%)

1CAD = 1.6128 Real

Thus value of it's holding at year end = 361600/1.6128

= 224206.3 CAD

b) If it had earned 10% then amount in real at year end = 320,000+(320,000*10%)

=320,000+32000 = 3,52,000 real

Exchange rate :

At end of year real has apreciated , it means real has become stronger and CAD weak

At year end : 1 CAD = 1.28 + (1.28*14%)

=1.28 + 0.1792

=1.4592

1CAD =1.4592 real

thus value of holdings = 320,000/1.4592 = 2,19,298.2 CAD

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