Suppose the 1-Year Risk-Free Rate of Return in the U

question 20

Multiple Choice

Suppose the 1-year risk-free rate of return in the U.S.is 4% and the 1-year risk-free rate of return in Britain is 7%.The current exchange rate is 1 pound = U.S.$1.65.A 1-year future exchange rate of __________ for the pound would make a U.S.investor indifferent between investing in the U.S.security and investing the British security.

• A)1.6037
• B)2.0411
• C)1.7500
• D)2.3369
• E)none of the above

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Definitions:

Cost of Debt

The effective rate that a company pays on its total debt, reflecting the expense of borrowing funds.

Straight-Line Depreciation

A method of allocating an asset's cost evenly across its useful life.

After-Tax Annual Lease Payment

The amount of money paid every year for a lease after accounting for taxes.

Tax Rate

The fraction of earnings or revenue that governmental bodies levy as tax from individuals or corporations.