International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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MNC Cash Flows and Exchange Rate Risk Asheville Co. has a subsidiary in Mexico that develops software for its parent. It rents a large facility in Mexico and hires many people in Mexico to work in the facility. Asheville Co. has no other international business. All operations are presently funded by Asheville’s parent. All the software is sold to U.S. firms by Asheville’s parent and invoiced in U.S. dollars.If the Mexican peso appreciates against the dollar, does this have a favorable effect, unfavorable effect, or no effect on Asheville’s value?
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.
Transaction Exposure
Fischer, Inc., exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why?
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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)…arrow_forwardSuppose 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 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. Canada Sales -Cost of materials $315 C$5 $45 C$150 -Operating expenses $55 -Interest expenses $5 C$10 Cash flows $210 -$C155 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 each…arrow_forwardAssume a Japanese company, Ascent Robotics, sells its equipment to a U.S. client invoicing half of the bill in yen and the remaining half in U.S. dollars. Which type of hedging through invoice currency does this situation represent? Shifting exchange exposure Money market hedge Sharing exchange exposure Diversifying exchange exposurearrow_forward
- EXERCISE 1: Vegas Corp. is a U.S. firm that exports most of its products to Canada. It historically invoiced its products in Canadian dollars to accommodate the importers. However, it was adversely affected when the Canadian dollar weakened against the U.S. dollar. Since Vegas did not hedge, its Canadian dollar receivables were converted into a relatively small amount of U.S. dollars. After a few more years of continual concern about possible exchange rate movements, Vegas called its customers and requested that they pay for future orders with U.S. dollars instead of Canadian dollars. At this time, the Canadian dollar was valued at $.81. The customers decided to oblige since the number of Canadian dollars to be converted into U.S. dollars when importing the goods from Vegas was still slightly smaller than the number of Canadian dollars that would be needed to buy the product from a Canadian manufacturer. Based on this situation, has transaction exposure changed for Vegas Corp.? Has…arrow_forwardConsider a U.S. firm that deals in only one foreign currency, the peso. Fill in the blanks to describe the economic exposure of the firm to changes in the value of the peso. If the peso depreciates, interest from investments in Mexico will likely investments will If the peso depreciates, the in borrowed funds from Mexico increases However, if the peso appreciates, interest from those decreases on borrowed funds from Mexico However, if the peso appreciates, the interest owed onarrow_forward
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