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Cloth plc is the parent of the enterprise and has a manufacturing subsidiary, Tweed Inc, which is based in the US. Tweed Inc purchases 60% of its manufacturing inputs from the parent company, and the remaining 40% from an unrelated New Zealand company Darwin Wools Limited. Tweed Inc sells 40% of its output to retailers in the Eurozone, 40% to retailers in the UK, and exports the remaining 20% to retailers in Canada.
Tweed Inc is negotiating with their New Zealand supplier, Darwin Wools Limited, to purchase a consignment of wool. The order is for 1 million kilos of wool. Darwin Wools Limited has insisted that they receive New Zealand Dollars (NZ$). Tweed Inc agree to pay NZ$ 500,000 for the wool in 6 months’ time, though are concerned that the US$/NZ$ exchange rate might change adversely. The following market information is available:
Current spot exchange rate US$1/ NZ$1.49 Forward rate (6 months) US$1/ NZ$1.42
NZ borrowing rate 2.00% p.a. NZ investment rate 1.00% p.a.
US borrowing rate 3.00% p.a. US investment rate 2.50% p.a.
Call option exercise price US$1/ NZ$1.40 Put option premium $10,000
Required:
a) Identify and calculate the costs of not hedging and the alternative strategies available for hedging this risk and advise which strategy would have produced the best outcome assuming the actual spot rate in 6 months’ time is US$1/ NZ$1.45.
b) As mentioned above, a significant number of Tweed Inc’s exports are made to the Eurozone. Explain how a
c) Define economic exposure and explain, in detail, the techniques a company could use to reduce foreign exchange risk.
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- Stiff Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, SeaBeW Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for the subsidiary for the fiscal year-end December 31, 2024, are as follows: Sales Cost of Goods Sold Beginning Inventory Purchases Cost of Goods Sold Depreciation B. Goods Available For Sale Less: Ending Inventory Selling and Admin. Expenses Income Taxes Net Income Current Assets Cash Accts. Rec. Inventories Required: A. SeaBeWe Corporation Income Statement 155,000 171,000 285,000 611,000 SeaBeWe Corporation Partial Balance Sheet 310,000 265,000 575,000 285,000 290,000 79,000 155,000 32,000 July 1, 2022 Jan. 1, 2024 June 30, 2024 Dec. 31, 2024 Average for 2024 1. Cost of Goods Sold. 2. Depreciation Expense. 3. Equipment. Other Information: 1. Equipment costing 340,000 pounds was acquired July 1, 2022, and 38,000 was acquired June 30, 2024. Depreciation for the period was as follows: Pounds 650,000…arrow_forwardWhitehill Chemicals has two operating divisions. Its Formulation Division in the United States mixes, processes, and tests basic chemicals, and then ships them to Ireland, where the company's Commercial Division uses the chemicals to produce and sell various products. Operating expenses amount to $26.6 million in the U.S. and $78.6 million in Ireland exclusive of the costs of any goods transferred from the U.S. Revenues in Ireland are $201 million. If the chemicals were purchased from one of the company's Irish mixing divisions, the costs would be $39.6 million. However, if it had been purchased from an independent U.S. supplier, the cost would be $52.6 million. The marginal income tax rate is 20 percent in the U.S. and 12 percent in Ireland. Required: What is the company's total tax liability to both jurisdictions for each of the two alternative transfer pricing scenarios ($39.6 million and $52.6 million)? Note: Enter your answers in dollars and not in millions of dollars. Total tax…arrow_forwardUse the following information for Exercises 10 through 12: Babcock Company manufactures fast-baking ovens in the United States at a production cost of $500 per unit and sells them to uncontrolled distributors in the United States and a wholly-owned sales subsidiary in Canada. Babcock's U.S. distributors sell the ovens to restaurants at a price of $1,000, and its Canadian subsidiary sells the ovens at a price of $1,100. Other distributors of ovens to restaurants in Canada normally earn a gross profit equal to 25 percent of selling price. Babcock's main competitor in the United States sells fast-baking ovens at an average 50 percent markup on cost. Babcock's Canadian sales subsidiary incurs operating costs, other than cost of goods sold, that average $250 per oven sold. The average operating profit margin earned by Canadian distributors of fast-baking ovens is 5 percent.arrow_forward
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