Quiz 3A (1).docx - Quiz 3 Company B(USA exports heavy crane...

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Quiz 3 Company B (USA) exports heavy crane equipment to several Malaysian facilities. Sales are currently 20,000 units per year at the ringgit equivalent of $24,000 each. The Malaysian ringgit has been trading at ringgit 3.4055/$, but a local advisory service predicts the ringgit will drop in value next week to ringgit 4.00/$, after which it will remain unchanged. Accepting this forecast as given, Company B faces a pricing decision in the face of the impending devaluation. It may either (1) maintain the same ringgit price and preserve demand, or (2) change the ringgit price in Malaysia to exactly offset the devaluation, and experience a 30% change in unit volume. Production is entirely based in the U.S. Variable costs are $15,000 per unit. Fixed costs amount to $10,000,000 per year. There is no depreciation. The U.S. corporate tax rate is 35%. At the end of each year, accounts receivable plus inventory will be equal to one-fourth of annual sales, and accounts payable will be equal to one-fifth of variable costs. Company B uses a WACC of 10%. a What is the impact of the devaluation of the ringgit on the value of Company B under alternatives (1) and (2)? Show your calculations on the next page. b Based on your calculations, what do you suggest Company B do? Should they maintain
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