International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Baxter, a US Company, has a 100% owned subsidiary in Japan. The functional currency for the subsidiary is the Japanese yen. The Japanese subsidiary purchases merchandise on credit from a Swiss company, with
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E) There will be a foreign exchange gain
ABC Inc. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Vietnamese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in China. Based on this information, ABC Inc. is subject to ____ exposure.
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ABC Ltd. ABC Ltd.’s principal business activity is the assembly of circuit boards. One of the key materials used is copper wiring, all of which is imported. As a cost cutting measure, a contract with a new overseas supplier was signed, and all of the company’s copper wiring is now supplied under this contract. Purchases are denominated in a foreign currency, but the company does not use forward exchange contracts in relation to its imports of copper wiring. The company has two production facilities, one of which produces goods for the export market, and the other produces goods for the domestic market. About half of its goods are exported, but the export market is suffering due to competition from cheaper producers overseas. Most domestic sales are made under contract with approximately 20 customers.
In October 2020, production was halted for a week at the production facility which supplies the domestic market. A number of customers had returned goods, claiming faults in the circuit…
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- Whitehill 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 $26.7 million in the U.S. and $78.7 million in Ireland exclusive of the costs of any goods transferred from the U.S. Revenues in Ireland are $202 million. If the chemicals were purchased from one of the company's Irish mixing divisions, the costs would be $39.7 million. However, if it had been purchased from an independent U.S. supplier, the cost would be $52.7 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 ($39.7 million and $52.7 million)? Note: Enter your answers in dollars and not in millions of dollars. Total tax…arrow_forwardA company based in the United States makes a transaction with a Japanese Company. The contract states that $5500,000 (U.S. dollars) must be transferred in order to settle the transaction. From the perspective of the Japanese company, this transaction is denominated in what currency?arrow_forwardAn U.S. firm requires C$230,000 in 90 days to pay the imports from Canada. To avoid currency exchange rate risk, it needs to __________ A. purchase Canadian dollars (C$) 90 days from now at the spot rate B. obtain a 90-day forward sale contract on Canadian dollars (C$) C. obtain a 90-day forward purchase contract on Canadian dollars (C$) D. sell Canadian dollars (C$) 90 days from now at the spot ratearrow_forward
- Tex Hardware sells many of its products overseas. The following are some selected transactions. Tex sold electronic subassemblies to a firm in Denmark for 160,000 Danish kroner (Dkr) on June 6, when the exchange rate was Dkr 1 = $0.1710. Collection was made on July 3 when the rate was Dkr 1 = $0.1713. On July 22, Tex sold copper fittings to a company in London for £36,000 with payment due on September 20. Also, on July 22, Tex entered into a 60-day forward contract to sell £36,000 at a forward rate of £1 = $1.630. The forward contract is not designated as a hedge. The spot rates follow: July 22 £1 = $1.580 September 20 £1 = $1.612 Tex sold storage devices to a Canadian firm for C$75,000 (Canadian dollars) on October 11, with payment due on November 10. On October 11, Tex entered into a 30-day forward contract to sell Canadian dollars at a forward rate of C$1 = $0.730. The forward contract is not designated as a hedge. The spot rates were as follows: October 11 C$1 =…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 $27.2 million in the U.S. and $79.2 million in Ireland exclusive of the costs of any goods transferred from the U.S. Revenues in Ireland are $207 million. If the chemicals were purchased from one of the company's Irish mixing divisions, the costs would be $40.2 million. However, if it had been purchased from an independent U.S. supplier, the cost would be $53.2 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 ($40.2 million and $53.2 million)? Note: Enter your answers in dollars and not in millions of dollars. Total tax…arrow_forwardBaltimore, Inc., is a U.S.‑based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its products are invoiced in euros. Explain how Baltimore can attempt to reduce its economic exposure to exchange rate fluctuations in the euro.arrow_forward
- Spindler, Incorporated (a U.S.-based company), imports surfboards from a supplier in Brazil and sells them in the United States. Purchases are denominated in terms of the Brazilian real (BRL). During 2023, Spindler acquires 280 surfboards at a price of BRL 1,600 per surfboard, for a total of BRL 448,000. Spindler will pay for the surfboards when it sells them. Relevant exchange rates are as follows: Date September 1, 2023 December 1, 2023 December 31, 2023 March 1, 2024 U.S. Dollar per Brazilian Real (BRL) $ 0.210 0.200 0.220 0.205 Required: a. Assume that Spindler acquired the surfboards on September 1, 2023, and made payment on December 1, 2023. What is the effect of the exchange rate fluctuations on reported income in 2023? b. Assume that Spindler acquired the surfboards on December 1, 2023, and made payment on March 1, 2024. What is the effect of the exchange rate fluctuations on reported income in 2023 and 2024? c. Assume that Spindler acquired the surfboards on September 1, 2023,…arrow_forwardABC Inc. is a US company that is considering moving its manufacturing facility to Mexico. The Mexican subsidiary manufactures toys for kids which will be sold to Mexican households in big cities. The cost to purchase and equip the facility is 20,000,000 Mexican pesos. The company's production, administrative and sales department have supplied the estimates of earnings and annual changes in net working capital, interest rates in Mexico and the US, the current peso/dollar exchange rate as follows: year US interest rate Mexico's interest rate Pesos per dollar Initial investment EBIT Change in net working capital Capital expenditure Unit: Mexican Peso 0 18 -20,000,000 1 2 3 1.50% 1.50% 1.50% 7.25% 7.25% 7.25% 100,000 140,000 948,000 250,000 40,000 40,000 0 0 Perform an NPV analysis to determine whether this is a good investment, under the following assumptions: a) The peso/dollar exchange rate is currently 18pesos/$, and the peso is expected to appreciate/depreciate at a rate justified by…arrow_forwardXYZ Corporation exchanges Japanese yen (JPY) into US dollars. They exchange 50,000,000 JPY into USD. The exchange rate between the Japanese yen (JPY) and the US dollar (USD) is 1 JPY = 0.0082 USD. However, XYZ Corporation incurs a currency exchange fee of 1.5% on the transaction. How much will XYZ Corporation receive in US dollars after deducting the currency exchange fee?arrow_forward
- Erie Co. has most of its business in the United States, except that it exports to Belgium. Its exports were invoiced in euros (Belgium’s currency) last year. It has no other economic exposure to exchange rate risk. Its main competition when selling to Belgium’s customers is a company in Belgium that sells similar products, denominated in euros. Starting today, Erie Co. plans to adjust its pricing strategy to invoice its exports in U.S. dollars instead of euros. Based on the new strategy, will Erie Co. be subject to economic exposure to exchange rate risk in the future? Briefly explain.arrow_forwardGanado Corporation recently received a payment for one of the consignments it exported to Europe, It has 2,000 Euros (€ or EUR) with it. Wanting to exchange all of these for Russian rubles(R or RUB) since it will be importing a new machine from a merchant in Russia, it obtains the following quotes: Spot rate USD=1.00 EUR (or $/€) Spot rate RUB=1.00 USD (or R/S) a. What is the Russian ruble to euro crossrate? b. How many Russian rubles will you obtain for your Euros? 1.1280 62.40arrow_forwardNewberry, Inc., whose reporting currency is the U.S. dollar ($), has a subsidiary in Argentina, whose functional currency also is the $. The subsidiary acquires inventory on credit on November 1, 2017, for 100,000 pesos that is sold on January 17, 2018, for 130,000 pesos. The subsidiary pays for the inventory on January 31, 2018. Currency exchange rates are as follows:Cost of goods sold . . .. LCU 5,000,000Beginning inventory . . . . . . . 500,000Ending inventory . . . . . . . . . . 600,000November 1, 2017 . . . . $0.16 = 1 pesoDecember 31, 2017 . ...... . . 0.17 = 1January 17, 2018 . . . . . . . . . 0.18 = 1January 31, 2018 . . . . . . . . 0.19 = 1 What amount does Newberry’s consolidated balance sheet report for this inventory at December 31, 2017? Choose the correct.a. $16,000.b. $17,000.c. $18,000.d. $19,000.arrow_forward
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