Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economicexposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the onlyforeign currency in which it deals).Salem estimates it's cash flows from both the U.S., in dollars, and Canada, in Canadian dollars. These figures are summarized in the following table.U.S. CanadaSales-Cost of materials$315C$5$45C$150-Operating expenses$55-Interest expenses$5C$10Cash flows$210-$C155Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios.The following table shows Salem's cash flows under each of these exchange rates.For each exchange rate scenario, fill in rows (2), (3), (5), (6), (9), and (10). Finally, fill in the last row for net cash flows in U.S. dollars for eachexchange rate. Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios.The following table shows Salem's cash flows under each of these exchange rates.For each exchange rate scenario, fill in rows (2), (3), (5), (6), (9), and (10). Finally, fill in the last row for net cash flows in U.S. dollars for eachexchange rate.Sales(1) U.S. Sales(2) Canadian Sales(3) Total Sales in U.S. $Exchange Rate ScenarioC$1=$0.70Exchange Rate ScenarioC$1=$0.75Exchange Rate ScenarioC$1=$0.80(Millions)(Millions)(Millions)$315$315$315C$5 = $C$5 = $3.75C$5 = $$318.75Cost of Materials and Operating Expenses(4) U.S. Cost of Materials$45$45$45(5) Canadian Cost of MaterialsC$150 = $C$150=$112.50C$150 = $(6) Total Cost of Materials in U.S. $$157.50(7) Operating Expenses$55$55$55Interest Expense(8) U.S. Interest Expense(9)Canadian Interest Expense(10) Total Interest Expenses in U.S.Cash Flows in U.S.$ before Taxes$5$5$5C$10 = $C$10 = $7.50C$10 = $$+A$12.50$+A$93.75+A

The cash flows which are based upon the exchange rates depend upon the rate of exchange between the…

Answered: Suppose that Salem Co, a U.S.-based MNC…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 5ST

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Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals). Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios. The following table shows Salem’s cash flows under each of these exchange rates. Use the table to answer the question that follows. Exchange Rate Scenario Exchange Rate Scenario Exchange Rate Scenario C$1=$0.70 C$1=$0.75 C$1=$0.80 (Millions) (Millions) (Millions) Sales (1) U.S. Sales $315 $315 $315 (2) Canadian Sales $3.50 $4.00 $4.00 (3) Total Sales in U.S. $ $318.50 $318.75 $319.00 Cost of Materials and Operating Expenses (4)…
Kittle estimates it's cash flows from both the U.S., in dollars, and Canada, in Canadian dollars, for a typical quarter. These figures are summarized in the following table. U.S. Canada Sales $310 C$3 -Cost of materials $50 C$200 -Operating expenses $60 -Interest expenses $5 C$10 Cash flows $195 -$C207 Kittle believes that the value of the Canadian dollar will be either $0.80 or $0.90 and seeks to analyze its cash flows under each of these scenarios. The following table shows Kittle's cash flows under each of these exchange rates. Sales (1) U.S. Sales (2) Canadian Sales (3) Total sales in U.S. $ Cost of Materials and Operating Expenses (4) U.S. Cost of Materials (5) Canadian Cost of Materials (6) Total Cost of Materials in U.S. $ (7) Operating Expenses Interest Expense Exchange Rate Scenario C$1=$0.80 Exchange Rate Scenario C$1=$0.90 (Millions) (Millions) $310 $310 C$3 X $0.80 = $2.40 C$3 X $0.90 = $2.70 $312.40 $312.70 $50 $50 C$200 X $0.80 = $160.00 C$200 X $0.90 = $180.00 $210.00…
(b) Kenduri Co is considering whether or not to manage the foreign exchange exposure by using multilateral netting from the UK, with the Sterling Pound (£) as the base currency. Multilateral netting is undertaken in order to show the cash flow transaction. The following cash flows between Kenduri with three subsidiaries; Lakama from United States, Jaia from Canada and Gochiso in Japan. Below are the details of cash flow transactions: Owed by Kenduri Owed to Lakama Jaia Amount US$ 4.5 million CAD 1.1 million Kenduri Kenduri Gochiso JPY 180 million Gochiso Jaia CAD 3.2 million Gochiso Lakama US$ 1.4 million Gochiso Kenduri GBP 25 million Jaia Lakama US$ 1.5 million Jaia Kenduri GBP 40 million Jaia Gochiso JPY 115 million Lakama Gochiso JPY 320 million Lakama GBP 2.1 million Kenduri Jaia Lakama CAD 2.5 million Calculate the impact of undertaking multilateral netting by Kenduri Co and its three subsidiary companies for the cash flows due in three months if the exchange rate is $1.5938/£,…
(b) Kenduri Co is considering whether or not to manage the foreign exchange exposure by using multilateral netting from the UK, with the Sterling Pound (£) as the base currency. Multilateral netting is undertaken in order to show the cash flow transaction. The following cash flows between Kenduri with three subsidiaries; Lakama from United States, Jaia from Canada and Gochiso in Japan. Below are the details of cash flow transactions: Owed by Kenduri Owed to Lakama Jaia Amount US$ 4.5 million CAD 1.1 million Kenduri Kenduri Gochiso JPY180 million Gochiso Jaia CAD 3.2 million Gochiso Lakama US$ 1.4 million Gochiso Kenduri GBP 25 million Jaia Lakama US$ 1.5 million Jaia Kenduri GBP 40 million Jaia Gochiso JPY 115 million Lakama Gochiso JPY 320 million Lakama GBP 2.1 million Kenduri Jaia Lakama CAD 2.5 million Calculate the impact of undertaking multilateral netting by Kenduri Co and its three subsidiary companies for the cash flows due in three months if the exchange rate is $1.5938/£,…
A US firm does business in Australia. In attempting to assess its economic exposure, it compiled the following information: Its U.S. sales are somewhat affected by the value of the Australian dollar (AU$), because it faces competition from Australian exporters. It forecasts the U.S. sales based on the following three exchange rate scenarios: Revenue from U.S. Business Exchange Rate of AU$ (in millions) AU$ = $.70 $100 AU$ = $.75 105 AU$ = $.80 110 Its Australian dollar revenues from sales in Australia invoiced in Australia dollars are expected to be AU$600 million Its anticipated cost of materials is estimated at $200 million from the purchase of U.S. materials and AU$100 million from the purchase of Australia materials Fixed operating expenses are estimated at $30 million Variable operating expenses are estimated at 20% of total sales (after including Australian sales, translated to a dollar amount) Interest expense is estimated at $20 million on existing U.S. loans, and the…
Belmonte Corporation, with a division located in Germany, must translate its financial statements from euros to U.S. dollars. What is the major accounting issue involved in translation? O Most accountants are not conversant in foreign currency exchange. O U.S. GAAP may differ from German GAAP. The U.S. dollar has been steadily falling relative to the euro. O The resulting balance sheet may not balance.
Using the cost and revenue information shown for Dekalb, Inc., determine how the costs, revenue, and cash flow items would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZS = $0.55, (2) NZS = $0.60, and (3) NZ$ = 50.65. (Assume U.S. sales will be unaffected by the exchange rate.) REVENUE AND COST ESTIMATES: DEKALB, INC. (IN MILLIONS OF U.S. DOLLARS AND NEW ZEALAND DOLLARS) U.S. Business Sales $1,000 Cost of Materials 650 Operating 350 New Zealand Business NZ$900 300 0 Expenses Interest Expense Cash Flow 250 -$250 0 NZ$600 Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Round your answers to the nearest dollar. Sales U.S. NZ$ = $0.55 NZ$ = $0.60 NZS = $0.65 $ 1,000 $ 1,000 $ 1,000 New Zealand Total NZ$900 - NZ$900 - NZ$900 - $ $ S Cost of Materials U.S. $ 650 New Zealand NZ$300 = NZ$300 = Total $ $ Operating expenses $ 350 Interest expenses $ 250 Cash flow $ 650 5 650 NZ$300…
Assume the United Kingdom (home) and the United States (foreign) have a fixed exchange rate regime. (i) A supply shock in the Foreign Exchange Market leads to an appreciation of the $/£ exchange rate. Explain how the Bank of England will intervene to defend the fixed exchange rate. Use graphs to support your answer. Label all axes. (ii) Discuss the effects on the domestic economy of this intervention. Which additional measures could the Bank of England take to offset these effects
Suppose a U.S. firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory. This firm is most likely trying to greatly reduce, or eliminate, which one of the following? Interest rate disparities Short-run exposure to exchange rate risk Long-run exposure to exchange rate risk Political risk associated with the foreign operations Translation exposure to exchange rate risk
Suppose InBev Corporation (a non-U.S. MNC) buys Anheuser-Busch Corporation (a U.S. corporation) by paying the U.S. shareholders in cash. Which of the following can be said of the US capital account? Group of answer choices The acquisition of cash by US shareholders will decrease foreign ownership, which will be recorded as a debit. The US federal reserve will increase its currency reserves. InBev's reduction in cash will be recorded as a debit on the U.S. capital account.. InBev's increased ownership of US assets is recorded as a credit. U.S. shareholders increased ownership in InBev will be recorded as a credit.
Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign exchange gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates? Ο Α. O Yen Euros exchangeable exchangeable for $1 for $1 Increase Increase B. Decrease Decrease C. D. Increase Decrease Increase Decrease
ABC Inc. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Sunland francs. These two currencies are highly negatively correlated in their movements against the dollar. Jonathan Inc. is a U.S.-based MNC that has the same exposure as ABC Inc. in these currencies, except that its Sunland francs represent cash outflows. Which firm has a high exposure to exchange rate risk? A. neither firm has any exposure. B. ABC Inc. C. the firms have about the same level of exposure. D. Jonathan Inc.

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