Finance

Answer to Question  1
The forward premium on a currency is normally expressed as a percentage deviation of that currency from the spot rate.

The annualized percentage of premium can be calculated using the following formula

Forward premiumForward  Spot rateX12X100Spot rateLength of forward contract(In months)Forward premium1.71  1.68X12X1001.686Forward premium3.571

The spot rate of a currency is the rate at which that currency is traded in the market for an immediate delivery of the currency to its buyer.

Forward rate is the rate at which a currency is traded in the market for delivery at a point of time in future, or can be termed as the current prediction of the spot rate of a currency at a given point in future.

The forward rate is slightly different from the spot rate based on the risk perceived in the currency by the market. If the currency is expected to perform well in future the forward will be at a premium (higher rate) to the spot rate, however, if the currency is not expected to perform well in future the forward rate for the currency will be at a discount (lower rate) as compared to its spot rate.

Answer to Question  2
Cash outflowPurchase price 2,400,000Less tax shield benefit from tax loss carry forward (600,000 x 35) (210,000)Net cash outflow 2,190,000
Cash inflowsYears 1  20 300,000 Cash inflowPresent value of  300,000 x 7.963
(Total Present value of cash inflows for 20 years) 2,388,900
The present value factor for the 20 years (7.963), as shown above, is based on n  20, i  11
Total present value of inflows. 2,388,900Total cash outflow... 2,190,000Net present value. 198,900
The acquisition of Beta Corporation for  2,400,000 appears to be a viable decision as it gives Alpha Corporation a positive net present value of  198,900. Therefore, Alpha Corporation should go forward with the acquisition.

The acquisition  purchase of another company by an existing company can be evaluated in context of capital budgeting decision-making process. The motives behind such acquisitions can be both financial and non-financial.

Financial motives can include reducing the risk faced by the two companies though the acquisition of one by another and thus creating the portfolio effect, while maintaining the companys rate of return.

Further as a result of acquisition the resulting larger firm would be able to enjoy a comparatively better position for raising debt and equity capital from financial markets.

Non-Financial motives can be the effect of synergy brought in to the companys operations through the acquisition either through vertical or horizontal integration.