1. Suppose that the spot exchange rate between the Australian Dollar and the US Dollar is 0.8065 USD per AUD. The risk free rate of interest in Australia is 2% and the risk free rate is the US is 2.5%. The six-month forward exchange rate is 0.8099. What arbitrage opportunity is possible?
2. Free cash flow for an all-equity firm was $4 million last year. It is expected to grow by 20% in the current year, at a 15% rate annually for the five years after that, and then assume a more normal 4% growth rate thereafter (forever). The firm’s cost of equity is 10%. What is the value of the firm?