End-of-chapter 12 Problems

End-of-chapter 12 Problems - U.S $100 $105 $110 New Zealand...

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1 Moore School of Business Spring 2012 University of South Carolina IBUS 401 – INTERNATIONAL FINANCIAL MANAGEMENT Answers to selected end-of-chapters problems Chapter 12 Managing Economic Exposure and Translation Exposure Problems assigned: 1, 9, 11 1. Baltimore Inc. could reduce its economic exposure by shifting some of its U.S. expenses to Europe. This may involve shifting its sources of materials or even part of its production process to Europe. It could also reduce its European revenue but this is probably not desirable. 9. Carlton Company is subject to a higher degree of economic exposure because it does not have much offsetting cost in Mexico. Palmer Inc. incurs costs in Mexico for its research and development center. 11. Forecasted Net Cash Flows for St. Paul Company (Figures are in millions) NZ$ = $.48 NZ$ = $.50 NZ$ = $.54 Sales
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Unformatted text preview: U.S. $100 $105 $110 New Zealand NZ$600 = 288 NZ$600 = 300 NZ$600 = 324 Total $388 $405 $434 Cost of materials U.S. $200 $200 $200 New Zealand NZ$100 = 48 NZ$100 = 50 NZ$100 = 54 Total $248 $250 $254 Operating expenses U.S.: Fixed $ 30 $ 30 $ 30 U.S.: Variable (20% of total sales) 78 81 87 Total $108 $111 $117 Interest expense U.S. $ 20 $ 20 $ 20 New Zealand NZ$0 = 0 NZ$0 = 0 NZ$0 = 0 Total $ 20 $ 20 $ 20 Net Cash Flows $ 12 $ 24 $ 43 2 The forecasted income statements show that St. Paul Company is favorably affected by a strong New Zealand dollar (since its NZ$ inflow payments exceed its NZ$ outflow payments). St. Paul Company could reduce its economic exposure without reducing its New Zealand revenues by shifting expenses from the U.S. to New Zealand. In this way, its NZ$ outflow payments would be more similar to its NZ$ inflow payments....
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End-of-chapter 12 Problems - U.S $100 $105 $110 New Zealand...

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