Chapter 1, Problem 29QA

Aggie Co. produces chemicals. It is a major exporter to Europe, where it’s main competition is from other U.S. exporters. All these companies invoice the products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals.

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

Riverside Clippers Corp believes that the U.S. dollar may weaken in the coming months against the New Taiwanese Dollar and does not want to face any currency risk. Assume that Riverside Clippers Corp can enter into a forward contract today to purchase 175 NTD for $5.35. Should Riverside Clippers Corp manufacture the 800,000 garden tools in the Maryland facility or purchase them from the Taiwan supplier? Explain.

Rockford Company has a subsidiary in Argentina. The subsidiary does not have much debt because of the high interest costs resulting from the average annual inflation rate exceeding 100 percent. Most of its sales and expense transactions are denominated in Argentinean pesos, and the subsidiary attempts to minimize its receivables and payables. Although the subsidiary owns a warehouse, the primary asset is inventory that it receives from Rockford. The Argentinean government requires all companies located in Argentina to provide the central government with a financial report using the Argentinean system of accounts and government-mandated forms for financial statements. For each of these independent cases, determine The foreign entity’s recording currency in which its books and records are maintained. The foreign entity’s functional currency. The process to be used to restate the foreign entity’s financial statements into the reporting currency of the U.S.-based parent company.

ABC 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…