Board paper

Fundamentals of Corporate Finance 2079 Board Question Paper

FIN 250 · Fundamentals of Corporate Finance

Programme
BBS
Academic year
Fourth Year
Exam year
2079 BS
Sitting
regular
Full marks
100
Duration
180 minutes

Tribhuvan University

Faculty of Management

Office of the Dean

2079 BS / Regular Examination

Course: FIN 250 · Fundamentals of Corporate Finance

Level: Bachelor of Business Studies (BBS) · Fourth Year

Full Marks: 100

Time: 3 hrs.

Candidates are required to give their answers in their own words as far as practicable. The figures in the margin indicate full marks.

Section A

[10*2=20]

  1. Why might conflicts arise between stockholders and debt holders?

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    Conflicts Between Stockholders and Debt Holders

    Conflicts arise primarily over risk allocation:

    1. Risk Shifting / Asset Substitution: Stockholders benefit if high-risk projects yield extraordinary profits, but bondholders bear bankruptcy losses without sharing in supernormal profits.
    2. Underinvestment: Shareholders may reject positive NPV projects if the gains accrue primarily to debtholders by restoring debt solvency.
    3. Protective Covenants: Lenders impose restrictive covenants (debt caps, working capital minimums) to protect their claims.

  2. Differentiate between primary markets and secondary markets.

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    Primary vs. Secondary Securities Markets

    • Primary Market: Deals with the origination and initial offering of brand-new securities directly to the investing public, supplying new capital to corporate issuers (e.g., IPOs).
    • Secondary Market: Provides a continuous trading mechanism for existing securities among investors, providing liquidity and market valuation without generating fresh capital for the company (e.g., NEPSE).

  3. Who are the key participants in the transactions of financial institutions?

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    Key Participants in Financial Institution Transactions

    1. Households / Individual Savers: Net suppliers of funds through savings deposits and insurance policies.
    2. Business Enterprises / Corporations: Net demanders of capital for physical asset investments.
    3. Governments: Borrowers for public infrastructure and budget deficit financing.
    4. Financial Intermediaries: Banks, pension funds, and investment firms channeling capital efficiently.

  4. Define the term financial leverage.

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    Definition of Financial Leverage

    Financial leverage is the extent to which a business enterprise utilizes fixed-cost financing (debt and preferred stock) in its capital structure. It magnifies the effect of fluctuations in EBIT on Earnings Per Share (EPS).

  5. Assume that the interest rate on a 1-year T-bond is currently 7% and the rate on a 2-year bond is 9%. If the maturity risk premium is zero, what is a reasonable forecast of the rate on a 1-year bond next year?

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    Forecast of 1-Year Rate Next Year (r1=7%r_1 = 7\%, r2=9%r_2 = 9\%):

    (1+r2)2=(1+r1)(1+1f1)  ⟹  1+1f1=(1.09)21.07=1.18811.07=1.11037(1 + r_2)^2 = (1 + r_1)(1 + _{1}f_{1}) \implies 1 + _{1}f_{1} = \frac{(1.09)^2}{1.07} = \frac{1.1881}{1.07} = 1.11037
    1f1=1.11037−1=11.04%_{1}f_{1} = 1.11037 - 1 = \mathbf{11.04\%}

    Conclusion: The expected rate on a 1-year bond next year is 11.04%.

  6. A company’s sales, variable costs and fixed cost are Rs. 500,000, Rs. 300,000 and Rs. 100,000 respectively. It has borrowed Rs. 200,000 at 10 percent. Calculate the degree of financial leverage.

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    Calculation of Degree of Financial Leverage (DFL):

    • Sales = Rs. 500,000\text{Rs. } 500,000, VCVC = Rs. 300,000\text{Rs. } 300,000, FCFC = Rs. 100,000\text{Rs. } 100,000
    • EBIT=500,000−300,000−100,000=Rs. 100,000EBIT = 500,000 - 300,000 - 100,000 = \text{Rs. } 100,000
    • Debt = Rs. 200,000\text{Rs. } 200,000 at 10%  ⟹  I=Rs. 20,00010\% \implies I = \text{Rs. } 20,000DFL=EBITEBIT−I=100,000100,000−20,000=100,00080,000=1.25DFL = \frac{EBIT}{EBIT - I} = \frac{100,000}{100,000 - 20,000} = \frac{100,000}{80,000} = \mathbf{1.25}$ Conclusion: DFL is 1.25.

  7. Under water Technology stock is currently trading at Rs. 300 a share. What is the value of call option if exercise price is Rs. 250.

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    Value of Call Option:

    • Current Stock Price (SS) = Rs. 300\text{Rs. } 300
    • Exercise Price (XX) = Rs. 250\text{Rs. } 250Value of Call=max⁡(0,S−X)=max⁡(0,300−250)=Rs. 50\text{Value of Call} = \max(0, S - X) = \max(0, 300 - 250) = \mathbf{\text{Rs. } 50}$ Conclusion: The intrinsic value of the call option is Rs. 50.

  8. What is the annual percentage cost of trade credit (based a 360-day basis) under the credit terms of 2/10, net 40?

    [2]
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    Cost of Trade Credit (2/10, net 40, 360-day basis):

    APR=298×36040−10=0.020408×12=0.2449=24.49%APR = \frac{2}{98} \times \frac{360}{40 - 10} = 0.020408 \times 12 = 0.2449 = \mathbf{24.49\%}

    Conclusion: The annual percentage cost is 24.49%.

  9. Assume that today one Canadian dollar is worth 0.6667 U.S. dollar. How many Canadian dollars would you receive for one U.S. dollar?

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    Canadian Dollars Received for 1 US Dollar:

    • Given: CAD1=USD0.6667\text{CAD} 1 = \text{USD}0.6667CAD per US USD 1=10.6667=CAD1.50\text{CAD} \text{ per US } \text{USD } 1 = \frac{1}{0.6667} = \mathbf{\text{CAD} 1.50}$ Conclusion: You would receive Can$ 1.50 for one U.S. dollar.

  10. Suppose you want to buy a computer and local bank will lend you Rs. 100,000. Their loan will be fully amortized over 5 years, and the nominal interest rate will be 12% per annum. What will be the annual installment?

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    Annual Loan Installment Calculation:

    • Loan (PVPV) = Rs. 100,000\text{Rs. } 100,000, Term (nn) = 5 years, Rate (ii) = 12%12\%PVIFA12%,5=1−(1.12)−50.12=3.60478PVIFA_{12\%, 5} = \frac{1 - (1.12)^{-5}}{0.12} = 3.60478$
      PMT=100,0003.60478=Rs. 27,740.97PMT = \frac{100,000}{3.60478} = \mathbf{\text{Rs. } 27,740.97}
      Conclusion: The annual installment is Rs. 27,740.97.

Section B

Descriptive Answer Questions : Attempt any FIVE questions .

[5*10=50]

  1. Define forward and future contracts. Differentiate between forward and future contracts?

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    Forward vs. Futures Contracts

    1. Forward Contract: A private, bilateral, non-standardized over-the-counter (OTC) agreement between two parties to buy or sell an underlying asset at a specified price and date. High counterparty credit risk; settled at maturity.
    2. Futures Contract: A standardized contract traded on an organized futures exchange with standardized contract sizes, daily mark-to-market margin settlements, and clearinghouse guarantees virtually eliminating counterparty default risk.

  2. Why is preferred stock called hybrid security? Explain the key features of preferred stock.

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    Key Features of Preferred Stock as a Hybrid Security

    • Preference on Dividends: Must be paid prior to any common dividend distributions.
    • Fixed Dividend Rate: Expressed as a percentage of par or rupee amount per share.
    • Cumulative Clause: Unpaid passed dividends accumulate and must be settled in full before common equity payouts.
    • Preference on Liquidation Assets: Senior to common stockholders in corporate dissolution.

  3. An analyst evaluating securities has obtained the following information. The real rate of interest is 2% and is expected to remain constant for the next 3 years. Inflation is expected to be 3% next year, 3.5% the following year, and 4% the third year. The maturity risk premium is estimated to be 0.1 x (t - 1)%, wheret = number of years to maturity. The liquidity premium on relevant 3-year securities is 0.25% and the default risk premium on relevant 3-year securities is 0.6%.

    a. What is the yield on a 1-year T-bill?

    b. What is the yield on a 3-year T-bond?

    c. What is the yield on a 3-year corporate bond?

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    Step-by-Step Yield Calculations:

    Given: r∗=2%r^* = 2\%, I1=3%I_1 = 3\%, I2=3.5%I_2 = 3.5\%, I3=4%I_3 = 4\%. MRPt=0.1(t−1)%MRP_t = 0.1(t - 1)\%, LP3=0.25%LP_3 = 0.25\%, DRP3=0.6%DRP_3 = 0.6\%.

    • a. Yield on 1-Year T-bill:

      IP1=3.0%,MRP1=0.1(1−1)=0%IP_1 = 3.0\%, \quad MRP_1 = 0.1(1 - 1) = 0\%
      r1=r∗+IP1+MRP1=2%+3%+0%=5.0%r_1 = r^* + IP_1 + MRP_1 = 2\% + 3\% + 0\% = \mathbf{5.0\%}

    • b. Yield on 3-Year T-bond:

      IP3=3+3.5+43=10.53=3.5%IP_3 = \frac{3 + 3.5 + 4}{3} = \frac{10.5}{3} = 3.5\%
      MRP3=0.1(3−1)=0.2%MRP_3 = 0.1(3 - 1) = 0.2\%
      r3=r∗+IP3+MRP3=2%+3.5%+0.2%=5.70%r_3 = r^* + IP_3 + MRP_3 = 2\% + 3.5\% + 0.2\% = \mathbf{5.70\%}

    • c. Yield on 3-Year Corporate Bond:

      rcorp,3=r3+LP3+DRP3=5.70%+0.25%+0.60%=6.55%r_{\text{corp}, 3} = r_3 + LP_3 + DRP_3 = 5.70\% + 0.25\% + 0.60\% = \mathbf{6.55\%}

  4. Magee Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, and ships them to its chain of retail stores. Magee’s balance sheet as of December 31, 2018, is shown here (Rs millions):

    Balance Sheet as of December 31, 2018
    Assets Liabilities and Owners’ Equity
    Current assets Current liabilities
    Cash Rs 3.5 Accounts Payable Rs 9.0
    Accounts Receivable 26.0 Notes payable 18.0
    Inventory 58.0 Accruals 8.5
    Total current assets Rs 87.5 Total Current Liabilities Rs 35.5
    Fixed assets Long-term debt 6.0
    Net plant and equipment Rs 35.0 Owners’ equity
    Common stock and paid-in surplus Rs 15.0
    Retained earnings 66.0
    Total assets Rs 122.5 Total liabilities and owners’ equity Rs 122.5

    Sales for 2018 were Rs. 350 million, while net income for the year was Rs. 10.5 million. Magee paid dividends of Rs. 4.2 million to common stockholders. Sales are projected to increase by Rs. 70 million or 20 percent during 2019. The firm is operating at full capacity. Assume that the profit margin and dividend payout ratios remain constant.

    a. Using the equation, calculate the external funds needed for next year.

    b. Construct Magee’s pro forma balance sheet for December 31, 2019. Assume that all external capital requirements are met by bank loans and are reflected in notes payable.

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    Magee Computers AFN & Pro Forma Analysis:

    • Sales 2018 (S0S_0) = Rs. 350M\text{Rs. } 350\text{M}, Growth = 20%  ⟹  ΔS=Rs. 70M20\% \implies \Delta S = \text{Rs. } 70\text{M}, S1=Rs. 420MS_1 = \text{Rs. } 420\text{M}.
    • Operating at full capacity   ⟹  \implies All assets are spontaneous: A∗=Rs. 122.5MA^* = \text{Rs. } 122.5\text{M}.
    • Spontaneous Liabilities (L∗L^*) = Accounts Payable (9.09.0) + Accruals (8.58.5) = Rs. 17.5M\text{Rs. } 17.5\text{M}.
    • Profit Margin (MM) = 10.5350=0.03\frac{10.5}{350} = 0.03 (3%3\%).
    • Dividend Payout (dd) = 4.210.5=0.40  ⟹  \frac{4.2}{10.5} = 0.40 \implies Retention Ratio (bb) = 0.600.60.

    a. AFN Equation:

    AFN=(A∗S0)ΔS−(L∗S0)ΔS−M(S1)(b)AFN = \left(\frac{A^*}{S_0}\right)\Delta S - \left(\frac{L^*}{S_0}\right)\Delta S - M(S_1)(b)
    AFN=(122.5350)70−(17.5350)70−(0.03×420×0.60)AFN = \left(\frac{122.5}{350}\right)70 - \left(\frac{17.5}{350}\right)70 - (0.03 \times 420 \times 0.60)
    AFN=(0.35×70)−(0.05×70)−7.56=24.50−3.50−7.56=Rs. 13.44 MillionAFN = (0.35 \times 70) - (0.05 \times 70) - 7.56 = 24.50 - 3.50 - 7.56 = \mathbf{\text{Rs. } 13.44 \text{ Million}}

    b. Pro Forma Balance Sheet (Dec 31, 2019):

    • Total Assets: 122.5×1.20=Rs. 147.00M122.5 \times 1.20 = \mathbf{\text{Rs. } 147.00\text{M}}.
    • Spontaneous Liabilities: Accounts Payable (10.810.8) + Accruals (10.210.2) = Rs. 21.00M\text{Rs. } 21.00\text{M}.
    • Long-term Debt: Rs. 6.00M\text{Rs. } 6.00\text{M} (constant).
    • Common Stock: Rs. 15.00M\text{Rs. } 15.00\text{M} (constant).
    • Retained Earnings: 66.0+7.56=Rs. 73.56M66.0 + 7.56 = \text{Rs. } 73.56\text{M}.
    • Notes Payable (balancing plug):
      Notes Payable=147.00−(21.00+6.00+15.00+73.56)=147.00−115.56=Rs. 31.44M\text{Notes Payable} = 147.00 - (21.00 + 6.00 + 15.00 + 73.56) = 147.00 - 115.56 = \mathbf{\text{Rs. } 31.44\text{M}}
      (Original Notes Payable Rs 18.0M + AFN Rs 13.44M = Rs 31.44M).

  5. The Bowman, Inc., currently has 320,000 shares outstanding. The stock sells for Rs. 400 per share. To raise Rs. 20 million for a new particle accelerator, the firm is considering a right offering at Rs. 250 per share.

    a. How many shares will have to be sold?

    b. How many rights are required to purchase one new share?

    c. What is the value of a right?

    d. A shareholder has 1,000 shares and Rs. 50,000 cash balance before the offering. Show the stockholders wealth before rights offering and after rights offering if all rights are exercised.

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    The Bowman, Inc. Rights Offering:

    • Existing Shares (N0N_0) = 320,000320,000, Price (P0P_0) = Rs. 400\text{Rs. } 400

    • Needed Funds = Rs. 20,000,000\text{Rs. } 20,000,000, Subscription Price (SS) = Rs. 250\text{Rs. } 250

    • a. Shares to be Sold: N=20,000,000250=80,000 sharesN = \frac{20,000,000}{250} = \mathbf{80,000 \text{ shares}}.

    • b. Rights per Share (NrN_r): Nr=320,00080,000=4 rightsN_r = \frac{320,000}{80,000} = \mathbf{4 \text{ rights}}.

    • c. Value of a Right (RR): R=400−2504+1=1505=Rs. 30R = \frac{400 - 250}{4 + 1} = \frac{150}{5} = \mathbf{\text{Rs. } 30}. (Ex-rights price Pe=400−30=Rs. 370P_e = 400 - 30 = \text{Rs. } 370).

    • d. Shareholder Wealth (1,000 shares + Rs. 50,000 cash):

      • Before Offering: (1,000×400)+50,000=400,000+50,000=Rs. 450,000(1,000 \times 400) + 50,000 = 400,000 + 50,000 = \mathbf{\text{Rs. } 450,000}.
      • After Exercising 1,000 Rights: New shares =1,000/4=250= 1,000 / 4 = 250 shares. Cost =250×250=Rs. 62,500= 250 \times 250 = \text{Rs. } 62,500.
      • Wait, cash is Rs 50,000 so shareholder exercises 800 rights (200 shares ×250=50,000\times 250 = 50,000) and sells 200 rights (200×30=6,000200 \times 30 = 6,000 cash).
      • Total Wealth =(1,200×370)+6,000=444,000+6,000=Rs. 450,000= (1,200 \times 370) + 6,000 = 444,000 + 6,000 = \mathbf{\text{Rs. } 450,000}. Wealth is fully preserved.

  6. Rise Against Corporation is comparing two different capital structure an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 210,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and Rs. 2.28 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

    a. If EBIT is Rs. 500,000, which plan will result in the higher EPS?

    b. If EBIT is Rs. 750,000, which plan will result in the higher EPS?

    c. What is the break-even EBIT?

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    Rise Against Corporation Capital Structure Comparison (No Taxes):

    • Plan I (Unlevered): 210,000 shares, Debt = 0, Interest = 0.

    • Plan II (Levered): 150,000 shares, Debt = Rs. 2.28M\text{Rs. } 2.28\text{M} at 8%  ⟹  I=Rs. 182,4008\% \implies I = \text{Rs. } 182,400.

    • a. At EBIT=Rs. 500,000EBIT = \text{Rs. } 500,000:

      EPSI=500,000210,000=Rs. 2.38,EPSII=500,000−182,400150,000=317,600150,000=Rs. 2.12EPS_I = \frac{500,000}{210,000} = \mathbf{\text{Rs. } 2.38}, \quad EPS_{II} = \frac{500,000 - 182,400}{150,000} = \frac{317,600}{150,000} = \mathbf{\text{Rs. } 2.12}
      Plan I (All-Equity) produces higher EPS.

    • b. At EBIT=Rs. 750,000EBIT = \text{Rs. } 750,000:

      EPSI=750,000210,000=Rs. 3.57,EPSII=750,000−182,400150,000=567,600150,000=Rs. 3.78EPS_I = \frac{750,000}{210,000} = \mathbf{\text{Rs. } 3.57}, \quad EPS_{II} = \frac{750,000 - 182,400}{150,000} = \frac{567,600}{150,000} = \mathbf{\text{Rs. } 3.78}
      Plan II (Levered) produces higher EPS.

    • c. Break-Even EBIT:

      EBIT∗210,000=EBIT∗−182,400150,000  ⟹  15EBIT∗=21EBIT∗−3,830,400\frac{EBIT^*}{210,000} = \frac{EBIT^* - 182,400}{150,000} \implies 15 EBIT^* = 21 EBIT^* - 3,830,400
      6EBIT∗=3,830,400  ⟹  EBIT∗=Rs. 638,4006 EBIT^* = 3,830,400 \implies EBIT^* = \mathbf{\text{Rs. } 638,400}

Section C

Analytical Answer Questions : Attempt any TWO questions .

[2*15=30]

  1. Define merger and acquisitions? Describe the concepts of horizontal, vertical and conglomerate merger. Also explain the growing need of mergers and acquisition in bank and financial institutions in Nepal.

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    Mergers and Acquisitions & Growing Need in Nepalese BFIs

    1. Definitions & Economic Types: Horizontal, vertical, and conglomerate combinations.
    2. Growing Need in Nepalese Banking Sector:
      • Systemic Fragility & Non-Performing Loans (NPL): Merging distressed regional institutions with resilient national banks.
      • Economies of Scope & Digital Banking: Spreading massive fintech infrastructure costs over wider deposit bases.
      • Single Borrower Capacity: Enhancing consortium lending scale for national hydropower projects.

  2. The Pawlowski Supply Company needs to increase its working capital by Rs. 4.4 million. The following three financing alternatives are available (assume a 365-day year):

    i. Forgo cash discounts (granted on a basis of “3/10, net 30”) and pay on the final due date.

    ii. Borrow Rs. 5 million from a bank at 15 percent interest, This alternative would necessitate maintaining a 12 percent compensating balance.

    iii. Issue Rs, 4.7 million of six-month commercial paper to net Rs. 4.4 million. Assume that new paper would be issued every six months. Commercial paper has no stipulated interest rate. It is sold at a discount, and the amount of the discount determines the interest cost to the issuer.Assuming that the firm would prefer the flexibility of bank financing, provided the additional cost of this flexibility was no more than 2 percent per annum.

    a. Calculate the annual percentage cost for each alternative.

    b. Which alternative should Pawlowski select? Why?

    c. What additional qualitative factor should Pawlowski consider before reaching a decision?

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    Pawlowski Supply Company Financing Analysis (Rs. 4.4 Million Needed):

    • Alternative i (Forgo Discount 3/10, net 30):
      APR=397×36520=56.44%APR = \frac{3}{97} \times \frac{365}{20} = \mathbf{56.44\%}
    • Alternative ii (Bank Loan at 15% with 12% Compensating Balance):
      • Gross Borrowing =Rs. 5,000,000= \text{Rs. } 5,000,000. Usable funds =5,000,000×0.88=Rs. 4,400,000= 5,000,000 \times 0.88 = \text{Rs. } 4,400,000.
      • Interest =15%×5,000,000=Rs. 750,000= 15\% \times 5,000,000 = \text{Rs. } 750,000.
        EIR=750,0004,400,000=17.05%EIR = \frac{750,000}{4,400,000} = \mathbf{17.05\%}
    • Alternative iii (6-Month Commercial Paper):
      • Face Value =Rs. 4,700,000= \text{Rs. } 4,700,000, Net Proceeds =Rs. 4,400,000= \text{Rs. } 4,400,000.
      • 6-Month Rate =300,0004,400,000=6.818%  ⟹  EAR=(1.06818)2−1=14.10%= \frac{300,000}{4,400,000} = 6.818\% \implies EAR = (1.06818)^2 - 1 = \mathbf{14.10\%}.
    • Decision: Commercial paper has lowest cost (14.10%). If firm values bank flexibility within 2% (17.05−14.10=2.95%>2%17.05 - 14.10 = 2.95\% > 2\%), commercial paper remains optimal.

  3. Given the following Exchange Rate for 31 July 2020

    Open Market Exchange Rates
    Currency Unit Buying/Rs. Selling/Rs
    U.S. Dollar 1 119.45 120.05
    European Euro 1 140.46 141.16
    UK Pound Sterling 1 155.49 156.27
    Swiss Franc 1 130.73 131.39
    Australian Dollar 1 85.42 85.85
    Singapore Dollar 1 86.87 87.30

    a. How much money would be realized by Nepalese exporter for U.S. Dollar 1,000? b. How much money would be payable for European Euro 10,000? c. You had Rs, 100,000 with you while traveling to USA. You had them converted into U.S. Dollar. However, your decision to travel cancelled. The U.S. Dollar you had now are required to be converted in Nepalese rupees. What is the profit or loss by this transaction? d. The current spot exchange rate between U.S. Dollar and Nepalese rupees is: NPR 120.05/US$ and the 1-year forward rate is: NPR 125.01/US$. The expected inflation rate in Nepal is 8.5 percent. What is the expected inflation rate in US?

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    Open Market Exchange Rate Computations:

    • a. Nepalese Exporter Realization for US$ 1,000: Exporter sells USD to bank at Buying Rate (119.45)   ⟹  1,000×119.45=NPR 119,450\implies 1,000 \times 119.45 = \mathbf{\text{NPR } 119,450}.
    • b. Amount Payable for Euro 10,000: Importer buys Euro from bank at Selling Rate (141.16)   ⟹  10,000×141.16=NPR 1,411,600\implies 10,000 \times 141.16 = \mathbf{\text{NPR } 1,411,600}.
    • c. Round-Trip Currency Conversion Loss on NPR 100,000:
      1. Buy USD at Selling Rate: 100,000120.05=USD832.99\frac{100,000}{120.05} = \text{USD}832.99.
      2. Sell USD back at Buying Rate: 832.99×119.45=NPR 99,500.66832.99 \times 119.45 = \text{NPR } 99,500.66.
      3. Net Loss due to Bid-Ask Spread: 100,000−99,500.66=NPR 499.34 loss100,000 - 99,500.66 = \mathbf{\text{NPR } 499.34 \text{ loss}}.
    • d. US Expected Inflation Rate (IUSI_{US}) via Relative PPP:
      FS=1+INepal1+IUS  ⟹  125.01120.05=1.0851+IUS  ⟹  1.041316=1.0851+IUS\frac{F}{S} = \frac{1 + I_{\text{Nepal}}}{1 + I_{US}} \implies \frac{125.01}{120.05} = \frac{1.085}{1 + I_{US}} \implies 1.041316 = \frac{1.085}{1 + I_{US}}
      1+IUS=1.0851.041316=1.04195  ⟹  IUS=4.20%1 + I_{US} = \frac{1.085}{1.041316} = 1.04195 \implies I_{US} = \mathbf{4.20\%}