Instructor: Harish Maurya, Anita Maskar,Mohammad Ismail
Course: FIN-336-X6777 Multinational Corp
Finance 23EW6
1. Malaysian Island Resort. Theresa Nunn is planning a30-day vacation on PulauPenang, Malaysia, one year from now. The present
charge for a luxury suite plus meals in Malaysian ringgit(RM) is RM1,050/day. The Malaysian ringgit presently trades at RM3.1350/$. She
determines that the dollar cost today for a30-day stay would be $10,047.85. The hotel informs her that any increase in its room charges
will be limited to any increase in the Malaysian cost of living. Malaysian inflation is expected to be 2.7555% annum, while U.S. inflation is
expected to be 1.295%.
a. How many dollars might Theresa expect to need one year hence to pay for her30-day vacation?
b. By what percent will the dollar cost have goneup? Why?
a. How many dollars might Theresa expect to need one year hence to pay for her30-day vacation?
The amount Theresa might expect to need one year hence to pay for her30-day vacation is $
. (Round to the
nearestcent.)
b. By what percent will the dollar cost have goneup?
The percentage the dollar cost will have gone up is
%. (Round to three decimalplaces.)
Why has the dollar cost changed by thispercentage? (Select the best choicebelow.)
A. The dollar cost has risen by the Malaysian ringgit inflation rate. This is a result ofTheresa’s estimation of the future suite costs and t
B. The dollar cost has risen by the U.S. dollar inflation rate. This is a result ofTheresa’s estimation of the present suite costs and the e
C. The dollar cost has risen by the U.S. dollar inflation rate. This is a result ofTheresa’s estimation of the future suite costs and the exc
D. The dollar cost has risen by the U.S. dollar inflation rate. This is a result ofTheresa’s estimation of the future suite costs and the exc
2. Argentine Float. The Argentine peso was fixed through a currency board at Ps1.00/$ throughout the 1990s. In January2002, the
Argentine peso was floated. On January29, 2003, it was trading at Ps3.21/$. During thatone-year period,Argentina’s inflation rate was
21% on an annualized basis. Inflation in the United States during that same period was 2.6% annualized.
a. What should have been the exchange rate in January 2003 if PPPheld?
b. By what percentage was the Argentine peso undervalued on an annualizedbasis?
c. What were the probable causes ofundervaluation?
a. What should have been the exchange rate in January 2003 if PPPheld?
The exchange rate in January2003, if PPPheld, should have been Ps
/$. (Round to five decimalplaces.)
b. By what percentage was the Argentine peso undervalued on an annualizedbasis?
On an annualizedbasis, the Argentine peso was undervalued by
%. (Round to three decimal places and include a
negative sign ifneeded.)
c. What were the probable causes ofundervaluation? (Select the best choicebelow.)
A. The rapid decline in the value of the U.S. dollar was a result of not onlyinflation, but also a severe crisis in the balance of payments
B. The rapid increase in the value of the Argentine peso was a result of not onlyinflation, but also a severe crisis in the balance of pay
C. The rapid increase in the value of the U.S. dollar was a result of not onlyinflation, but also a severe crisis in the balance of payment
D. The rapid decline in the value of the Argentine peso was a result of not onlyinflation, but also a severe crisis in the balance of paym
3. CasperLandsten-Thirty Days Later. Casper Landsten once again has $0.95 million(or its Swiss francequivalent) to invest for three
months. He now faces the following rates. Should he enter into a covered interest arbitrage(CIA) investment?
Arbitrage funds available
$
950,000
Spot exchange rate (SFr/$)
1.3392
3-month forward rate (SFr/$)
1.3286
U.S. Dollar annual interest rate
4.745 %
Swiss franc annual interest rate
3.624 %
The CIA profit potential is
%, which tells Casper Landsten he should borrow (1)
and invest in the
(2)
yieldingcurrency, the (3)
, and then sell the (4)
principal and interest forward three
months locking in a CIA profit. (Round to three decimal places and select from thedrop-down menus.)
The CIA profit amount is $
. (Round to the nearestcent.)
Should he enter into a covered interest arbitrage(CIA) investment? (Select the best choicebelow.)
A. Y
es, Casper should undertake the covered interest arbitragetransaction, as it would yield a riskless profit(exchange rate risk is elim
good on their contractual commitments to deliver the forward or pay theinterest) of $4,985.22 on each $0.95 million invested.
es, Casper should undertake the covered interest arbitragetransaction, as it would yield a riskless profit(exchange rate risk is elim
B. Y
good on their contractual commitments to deliver the forward or pay theinterest) of $950,000 on each $4,985.22 invested.
o, Casper should not undertake the covered interest arbitragetransaction, as it would yield a risky profit(exchange rate risk is incr
C. N
good on their contractual commitments to deliver the forward or pay theinterest) of $950,000 on each $4,985.22 invested.
o, Casper should not undertake the covered interest arbitragetransaction, as it would yield a risky profit(exchange rate risk is incr
D. N
good on their contractual commitments to deliver the forward or pay theinterest) of $4,985.22 on each $0.95 million invested.
(1)
Swiss francs
U.S. dollars
(2)
higher
lower
(3)
Swiss franc
U.S. dollar
(4)
Swiss franc
U.S. dollar
4. East Asiatic—Thailand. The East Asiatic Company(EAC), a Danish company with subsidiaries throughoutAsia, has been funding its
Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to
Thaibaht-denominated (B) debt. The treasurer ofEAC-Thailand is considering a1-year bank loan for $248,000. The current spot rate is
B32.05/$, and thedollar-based interest is 6.73% for the1-year period.1-year loans are 12.04% in baht.
a. Assuming expected inflation rates for the coming year of 4.5% and 1.22% in Thailand and the UnitedStates, respectively, according to
purchase powerparity, what would be the effective cost of funds in Thai bahtterms?
b. IfEAC’s foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht down against the
dollar by 5% over the coming year(to promote its export competitiveness in dollarmarkets), what might be the effective cost of funds in
bahtterms?
c. If EAC could borrow Thai baht at 13.00% perannum, would this be cheaper than either part a or part b?
a. Assuming expected inflation rates for the coming year of 4.5% and 1.22% in Thailand and the UnitedStates, respectively, according to
purchase powerparity, what would be the effective cost of funds in Thai bahtterms?
The effective cost offunds, in bahtterms, is
%. (Round to three decimalplaces.)
b. IfEAC’s foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht down against the
dollar by 5% over the coming year(to promote its export competitiveness in dollarmarkets), what might be the effective cost of funds in
bahtterms?
Assuming a future spot rate for the baht is 5% weaker than the current spot rate, the implied cost is
%. (Round to three
decimalplaces.)
c. If EAC could borrow Thai baht at 13.00% perannum, would this be cheaper than either part a or part b? (Select the best choicebelow.)
A. Part a is cheaper than borrowing at 13.00%. However, part a is highly risky given that the future spot rate is not known until a full ye
B. Part a and part b are both cheaper than borrowing at 13.00%. However, both are highly risky given that the future spot rate is not kn
C. Part b is cheaper than borrowing at 13.00%. However, part b is highly risky given that the future spot rate is not known until a full ye
D. Part a and part b both have a higher rate than 13.00%. Also, both are highly risky given that the future spot rate is not known until a
5. ClaytonMoore’s Money Fund. Clayton Moore is the manager of an international money market fund managed out of London. Unlike
many money funds that guarantee their investors a nearrisk-free investment with variable interestearnings, ClaytonMoore’s fund is a very
aggressive fund that searches out relativelyhigh-interest earnings around theglobe, but at some risk. The fund ispound-denominated.
Clayton is currently evaluating a rather interesting opportunity in Malaysia. Since the Asian Crisis of1997, the Malaysian government
enforced a number of currency and capital restrictions to protect and preserve the value of the Malaysian ringgit. The ringgit was fixed to
the U.S. dollar at RM3.80/$ for seven years. In2005, the Malaysian government allowed the currency to float against several major
currencies. The current spot rate today is RM3.13488 / $. Local currency time deposits of180-day maturities are earning 8.903% per
annum. The London eurocurrency market for pounds is yielding 4.203% per annum on similar180-day maturities. The current spot rate on
the British pound is $1.5821 / £, and the180-day forward rate is $1.5557 / £. The initial investment is £1,000,000.00.
The investment proceeds from the initial investment is £
The return on the180-day investment is
. (Round to two decimalplaces.)
%. (Round to three decimalplaces.)
If Clayton Moore invests in the Malaysian ringgitdeposit, and accepts the uncovered risk associated with theRM/$ exchange
rate(managed by thegovernment), and sells the dollar proceedsforward, he should expect a return of (1)
% on
than the (3)
% per annum he can earn in theeuro-pound
his180-day pound investment. This is (2)
market. (Round the percentage to three decimal places and select from thedrop-down menus.)
(1)
6.223
8.903
(2)
better
worse
(3)
6.223
8.903
3.80
3.80
4.203
4.203
6. Istanbul’s Issues. The Turkisk lira(TL) was officially devalued by the Turkish government in February 2001 during a severe political and
economic crisis. The Turkish government announced on February 21st that the lira would be devalued by 20%. The spot exchange rate on
February 20th was TL70,000 / $.
a. What was the exchange rate afterdevaluation?
b. What was the percentage change after falling to TL95,000 / $ on February24, three days after thedevaluation?
a. What was the exchange rate afterdevaluation?
The exchange rate after devaluation was TL
. (Round to the nearest Turkishlira.)
b. What was the percentage change after falling to TL95,000 / $ on February24, three days after thedevaluation?
The percentage change from the initial value after falling to TL95,000/$ is
change must be entered with a negativesign.)
The percentage change from the”devalued” value after falling to TL95,000/$ is
negative change must be entered with a negativesign.)
%. (Round to two decimal places. A negative
%. (Round to two decimal places. A
7. Trepak—The Russian Dance. Calculate the percentage change in the value of the ruble for the two different cross rates shown in the
table 1 for the five periods. Did the ruble fall further against the U.S. dollar or the Swissfranc?
For the period from November7, 2013 to November7, 2014:
The percentage change in Russian rubles per Swiss franc is
%. (Round to two decimalplaces.)
The percentage change in Russian rubles per U.S. dollar is
%. (Round to two decimalplaces.)
In thisperiod, did the ruble fall further against the U.S. dollar or the Swissfranc? (Select the best choicebelow.)
A. In thisperiod, the ruble fell further against the Swiss franc.
B. In thisperiod, the percentage change was the same for the ruble against the Swiss franc and the U.S. dollar.
C. In thisperiod, the ruble fell further against the U.S. dollar.
For the period from November7, 2014 to December4, 2014:
The percentage change in Russian rubles per Swiss franc is
%. (Round to two decimalplaces.)
The percentage change in Russian rubles per U.S. dollar is
%. (Round to two decimalplaces.)
In thisperiod, did the ruble fall further against the U.S. dollar or the Swissfranc? (Select the best choicebelow.)
A. In thisperiod, the ruble fell further against the Swiss franc.
B. In thisperiod, the percentage change was the same for the ruble against the Swiss franc and the U.S. dollar.
C. In thisperiod, the ruble fell further against the U.S. dollar.
For the period from December4, 2014 to December16, 2014:
The percentage change in Russian rubles per Swiss franc is
%. (Round to two decimalplaces.)
The percentage change in Russian rubles per U.S. dollar is
%. (Round to two decimalplaces.)
In thisperiod, did the ruble fall further against the U.S. dollar or the Swissfranc? (Select the best choicebelow.)
A. In thisperiod, the ruble fell further against the U.S. dollar.
B. In thisperiod, the percentage change was the same for the ruble against the Swiss franc and the U.S. dollar.
C. In thisperiod, the ruble fell further against the Swiss franc.
For the period from December16, 2014 to December24, 2014:
The percentage change in Russian rubles per Swiss franc is
%. (Round to two decimalplaces.)
The percentage change in Russian rubles per U.S. dollar is
%. (Round to two decimalplaces.)
In thisperiod, did the ruble fall further against the U.S. dollar or the Swissfranc? (Select the best choicebelow.)
A. In thisperiod, the percentage change was the same for the ruble against the Swiss franc and the U.S. dollar.
B. In thisperiod, the ruble fell further against the U.S. dollar.
C. In thisperiod, the percentage change did not fall. However, the ruble rose further against the U.S. dollar.
D. In thisperiod, the percentage change did not fall. However, the ruble rose further against the Swiss franc.
E. In thisperiod, the ruble fell further against the Swiss franc.
For the period from December24, 2014 to January16, 2015:
The percentage change in Russian rubles per Swiss franc is
%. (Round to two decimalplaces.)
The percentage change in Russian rubles per U.S. dollar is
%. (Round to two decimalplaces.)
In thisperiod, did the ruble fall further against the U.S. dollar or the Swissfranc? (Select the best choicebelow.)
A. In thisperiod, the percentage change was the same for the ruble against the Swiss franc and the U.S. dollar.
B. In thisperiod, the ruble fell further against the Swiss franc.
C. In thisperiod, the ruble fell further against the U.S. dollar.
1: Data Table
Russo-Swiss Cross—2015
Switzerland has long served as a cornerstone of banking conservatism and a safe port in a world of currency storms. Swiss banks had long
been used by investors from all over the world as financially secure institutions that would preserve thedepositor’s wealth with confidentialit
A large part of the security offered was the Swiss franc itself. Russian citizens of wealth had used Swiss banks heavily in recent years as a
place where they could shelter their capital frompolitics, both inside Russia and the outside(EU andUS) world. But beginning in the fall of
2014 the Russianruble’s value began to slide against the Swissfranc, threatening their wealth.
Exchange Rates
Nov. 7, 2013
Nov. 7, 2014
Dec. 4, 2014
Dec. 16, 2014
Dec. 24, 2014
Jan. 16, 2015
Russian rubles per Swiss
franc
35.282
48.251
56.246
70.285
55.365
76.641
Russian rubles per U.S.
dollar
32.405
46.735
54.416
67.512
54.625
65.067
8. BP and Rosneft 2015. BP(UK) and Rosneft(Russia) had severed along-term joint venture in2013, with Rosneft buying BP out with
$54 billion in cash and a20% interest(equity interest) in Rosneft itself. Rosneft financed a large part of the buyout by borrowing heavily.
The followingyear, in July2014, BP received a dividend on its ownership interest in Rosneft of RUB25 billion. ButRosneft’s performance
had beendeclining, as was the Russian ruble. The winter of2014-2015 in Europe was a relatively mildone, andEurope’s purchases
ofRosneft’s natural gas had fallen as had the price of natural gas.Rosneft’s total sales weredown, and the ruble had clearly fallen
dramatically. And to add debt to injury, Rosneft was due to make a payment of USD19.6 billion in 2015 on its debt from the BP buyout.
a. Assuming a spot rate of RUB34.78 = USD1.00 in July2014, how much was the dividend paid to BP in U.S.dollars?
b. If Rosneft were to pay the same dividend to BP in July2015, and the spot rate at that time was RUB75.04 = USD1.00, what would BP
receive in U.S.dollars?
c. If the combination of Western sanctions against Russia and lower global oil prices truly sent the Russian economy intorecession, and
the spot rate was RUB75.04 = USD1.00 in July2015, what mightBP’s dividend be in July2015?
a. Assuming a spot rate of RUB34.78 = USD1.00 in July2014, how much was the dividend paid to BP in U.S.dollars?
The dividend paid to BP is $
. (Round to the nearestcent.)
b. If Rosneft were to pay the same dividend to BP in July2015, and the spot rate at that time was RUB75.04 = USD1.00, what would BP
receive in U.S.dollars?
The dividend BP would receive is $
. (Round to the nearestcent.)
c. If the combination of Western sanctions against Russia and lower global oil prices truly sent the Russian economy intorecession, and
the spot rate was RUB75.04 = USD1.00 in July2015, what mightBP’s dividend be in July2015? (Select from the drop-down menus.)
BP’s dividend could very well be zero in 2015 if the Russian economy (1)
in the first half of theyear, andRosneft’s
from economicconditions, sanctions, and the (3)
profitability was (2)
of the ruble.
Even if Rosneft did manage to achieve a (4)
level of profit in2015, given its sizeable debt paymentobligation, it could
choose to not pay a dividend in order to preserve cash flow for debt service.
Finally, at least in the early spring of2015, there was a real possibility that the Russian government could institute capital controls that
would (5)
the (6)
(1)
the payment of the dividend to a foreign stockholder like BP. Capital controls were a real possibility because of
value of the ruble.
improved
worsened
(2)
destroyed
improved
(3)
fall
rise
(4)
negative
positive
(5)
force
prevent
(6)
plummeting
skyrocketing
9. Embraer of Brazil. Embraer of Brazil is one of the two leading global manufacturers of regional jets(Bombardier of Canada is theother).
Regional jets are smaller than the traditional civilian airliners produced by Airbus andBoeing, seating between 50 and 100 people on
average. Embraer has concluded an agreement with a regional U.S. airline to produce and deliver four aircraft one year from now for $84
million.
Although Embraer will be paid in U.S.dollars, it also possesses a currency exposure of inputs—it must pay foreign suppliers $21 million
for inputs one year from now(but they will be delivering the subcomponents throughout theyear). The current spot rate on the Brazilian
real(R$) is R$1.8238/$, but it has been steadily appreciating against the U.S. dollar over the past three years. Forward contracts are
difficult to acquire and are considered expensive. Citibank Brasil has not explicitly provided Embraer a forward ratequote, but has stated
that it will probably be pricing a forward off the current 3.75% U.S. dollar eurocurrency rate and the 97.50% Brazilian government bond
rate. Advise Embraer on its currency exposure.
How much of net cash position in Brazilian reais will Embraer receive in one year without a hedge if the expected spot rate in one year is
expected to be R$1.8238/$?
R$
(Round to the nearest wholenumber.)
How much in Brazilian reais will Embraer receive in one year if the net cash position is covered by aone-year forwardcontract?
R$
(Round to the nearest wholenumber.)
”In this case because the real is selling forward at a considerablediscount, the net long position—if sold forward—yields considerably
more reais than the current spotrate.”
The above statement is (1)
(1)
true
false
. (Select from thedrop-down menu.)
10. Chronos Time Pieces. Chronos Time Pieces of Boston exports watches to manycountries, selling in local currencies to stores and
distributors. Chronos prides itself on being financially conservative. At least70% of each individual transaction exposure ishedged, mostly
in the forwardmarket, but occasionally with options.Chronos’ foreign exchange policy is such that the70% hedge may be increased up to
a120% hedge if devaluation or depreciation appears imminent. Chronos has just shipped to its major North American distributor. It has
issued a90-day invoice to its buyer for €1,770,000. The current spot rate is $1.2213/€, the90-day forward rate is $1.2276/€. Chronos’
treasurer, MannyHernandez, has a very good track record in predicting exchange rate movements. He currently believes the euro will
weaken against the dollar in the coming 90 to 120days, possibly to around $1.1546/€.
a. Evaluate the hedging alternatives for Chronos if Manny is right(Case 1: $1.1546/€) and if Manny is wrong(Case 2: $1.2582 / €). What
do yourecommend?
b. What does it mean to hedge120% of a transaction exposure?
c. What would be considered the most conservative transaction exposure management policy by afirm? How does Chronoscompare?
a. Case1: Manny is right and the spot rate in 90 days is $1.1546/€.
How much in U.S. dollars will Chronos receive in 90 days if100% of the transaction exposure is hedged with the forwardcontract?
$
(Round to the nearestdollar.)
How much in U.S. dollars will Chronos receive in 90 days if70% of the transaction exposure is hedged with the forwardcontract?
$
(Round to the nearestdollar.)
How much in U.S. dollars will Chronos receive in 90 days if120% of the transaction exposure is hedged with the forwardcontract?
$
(Round to the nearestdollar.)
Case2: Manny is wrong and the spot rate in 90 days is $1.2582/€.
How much in U.S. dollars will Chronos receive in 90 days if100% of the transaction exposure is hedged with the forwardcontract?
$
(Round to the nearestdollar.)
How much in U.S. dollars will Chronos receive in 90 days if70% of the transaction exposure is hedged with the forwardcontract?
$
(Round to the nearestdollar.)
How much in U.S. dollars will Chronos receive in 90 days if120% of the transaction exposure is hedged with the forwardcontract?
$
(Round to the nearestdollar.)
If the value of the foreign currency is expected todepreciate, the (1)
will yield the greatest dollar value for the
accountsreceivable, while if the value of the foreign currency is expected toappreciate, the (2)
dollar value for the accounts receivable. (Select from thedrop-down menus.)
will yield the greatest
b. What would be considered the most conservative transaction exposure management policy by afirm? How does Chronoscompare?
”A full(100%) hedge is the most conservative hedging policy. Any time a firm may choose to leave any proportion uncovered or purchase
cover for more than the exposure(therefore creating a net shortposition), the firm could experience nearly unlimited losses orgains.”
. (Select from thedrop-down menu.)
The statement above is (3)
(1)
70% hedge
(2)
70% hedge
120% hedge
120% hedge
100% hedge
100% hedge
(3)
false
true
11.. Burton Manufacturing. Jason Stedman is the director of finance for BurtonManufacturing, aU.S.-based manufacturer of handheld
computer systems for inventory management.Burton’s system combines alow-cost active tag that is attached to inventory items(the tag
emits an extremelylow-grade radiofrequency) with custom designed hardware and software that tracks thelow-grade emissions for
inventory control. Burton has completed the sale of an inventory management system to a Britishfirm, Pegg Metropolitan(UK), for a total
payment of £1,300,000. The exchange rates shown in the popupwindow, 1, were available to Burton on the datesshown, corresponding
to the events of this specific export sale. Assume each month is 30 days.
a. What will be the amount of foreign exchange gain(loss) uponsettlement?
b. If Jason hedges the exposure with a forwardcontract, what will be the net foreign exchange gain(loss) onsettlement?
a. What will be the amount of foreign exchange gain(loss) uponsettlement? Enter a positive number for a gain or a negative number for a
loss.
$
(Round to the nearestdollar.)
b. If Jason hedges the exposure with a forward contract purchased on the date the product isshipped, what will be the net foreign
exchange gain(loss) onsettlement? Enter a positive number for a gain or a negative number for a loss.
$
(Round to the nearestdollar.)
If Jason hedges the exposure with a forward contract purchased on the date the contract issigned, what will be the net foreign exchange
gain(loss) onsettlement? Enter a positive number for a gain or a negative number for a loss.
$
(Round to the nearestdollar.)
1: Data Table
Date
Event
Spot Rate ($/£)
Forward Rate ($/£)
Days Forward
February 1
Price quotation for Pegg
1.7826
1.7742
210
March 1
Contract signed for sale
1.7451
1.7380
180
Contractamount, pounds
£1,300,000
June 1
Product shipped to Pegg
1.7572
1.7494
90
August 1
Product received by Pegg
1.7939
1.7900
30
September 1
Pegg makes payment
1.7158
–
–
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
12. Ganado Europe(B). Using facts in the chapter for GanadoEurope, assume that the exchange rate on January2, 2016, in Exhibit 11.6
dropped in value from $1.2300/€ to $0.8300/€. Recalculate GanadoEurope’s translated balance sheet for January2, 2016, with the new
exchange rate using the temporal rate method as shown in the popupwindow, 2.
a. What is the amount of translation gain orloss?
b. Where should it appear in the financialstatements?
c. Why does the translation loss or gain under the temporal method differ from the loss or gain under the current ratemethod?
a. What is the amount of translation gain orloss? Enter a positive number for a gain and negative for a loss.
$
(Round to the nearestdollar.)
b. Where should it appear in the financialstatements? (Select the best choicebelow.)
A. The translation gain(loss) for the year is added to the balance in the Cumulative Translation Adjustment(CTA) account.
B. The translation gain(loss) for the year is added to the balance in the Retained Earnings account.
C. The translation gain(loss) for the year is added to the balance in the Total Assets account.
D. The translation gain(loss) for the year is added to the balance in the Total Liabilities and Net Worth account.
c. Why does the translation loss or gain under the temporal method differ from the loss or gain under the current ratemethod? (Select the
best choicebelow.)
A. The exposed assets under the current rate method are larger than under the temporal method by the amount of inventory and net p
B. The exposed assets under the current rate method are larger than under the temporal method by the amount of cash and accounts
C. The exposed assets under the current rate method are larger than under the temporal method by the amount ofshort-term bank de
D. The exposed assets under the current rate method are larger than under the temporal method by the amount of accounts payable a
2: Data Table
EXHIBIT 11.6 GanadoEurope’s Translation Loss After Depreciation of theEuro: Temporal Method
December31, 2015
January2, 2016
Assets
In Euros (€)
Exchange Rate
(US$/euro)
Translated
Accounts(US$)
Exchange Rate
(US$/euro)
Translated
Accounts(US$)
Cash
1,600,000
1.2300
$1,968,000
0.8300
$1,328,000
Accounts receivable
2,700,000
1.2300
3,321,000
0.8300
2,241,000
Inventory
2,500,000
1.2490
3,122,500
1.2490
3,122,500
Net plant and equipment
5,500,000
1.3010
7,155,500
1.3010
7,155,500
Total
$15,567,000
12,300,000
$13,847,000
Liabilities and Net Worth
Accounts payable
1,000,000
1.2300
$1,230,000
0.8300
$830,000
Short-term bank debt
1,400,000
1.2300
1,722,000
0.8300
1,162,000
Long-term debt
1,700,000
1.2300
2,091,000
0.8300
1,411,000
Common stock
2,000,000
1.3010
2,602,000
1.3010
2,602,000
Retained earnings
6,200,000
1.2714 (a)
7,922,000
1.2714 (b)
7,922,000
(c)
?
Translation gain(loss)
Total
—
12,300,000
$15,567,000
$13,847,000
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earnings of all prioryears,
translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the euro.
(c) Under the temporalmethod, the translation loss would be closed into retained earnings through the income statement rather
than left as a separate line item as shown here.
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
13. Ganado Europe (C). Using facts in the chapter for GanadoEurope, assume the exchange rate on January2, 2016, in Exhibit 11.5
appreciated from $1.1300/€ to $1.6200/€. Calculate GanadoEurope’s translated balance sheet for January2, 2016, with the new
exchange rate using the current rate method as shown in the popupwindow, 3.
a. What is the amount of translation gain orloss?
b. Where should it appear in the financialstatements?
a. What is the amount of translation gain orloss? Enter a positive number for a gain and negative for a loss.
$
(Round to the nearestdollar.)
b. Where should it appear in the financialstatements? (Select the best choicebelow.)
A. The translation gain(loss) for the year is added to the balance in the Total Assets account.
B. The translation gain(loss) for the year is added to the balance in the Cumulative Translation Adjustment(CTA) account.
C. The translation gain(loss) for the year is added to the balance in the Retained Earnings account.
D. The translation gain(loss) for the year is added to the balance in the Total Liabilities and Net Worth account.
3: Data Table
EXHIBIT 11.5 GanadoEurope’s Translation Loss After Depreciation of theEuro: Current Rate Method
December31, 2015
January2, 2016
Assets
In Euros (€)
Exchange Rate
(US$/euro)
Translated
Accounts(US$)
Exchange Rate
(US$/euro)
Translated
Accounts(US$)
Cash
1,500,000
1.1300
$1,695,000
1.6200
$2,430,000
Accounts receivable
2,800,000
1.1300
3,164,000
1.6200
4,536,000
Inventory
2,700,000
1.1300
3,051,000
1.6200
4,374,000
Net plant and equipment
4,800,000
1.1300
5,424,000
1.6200
7,776,000
Total
$13,334,000
11,800,000
$19,116,000
Liabilities and Net Worth
Accounts payable
500,000
1.1300
$565,000
1.6200
$810,000
Short-term bank debt
1,900,000
1.1300
2,147,000
1.6200
3,078,000
Long-term debt
1,300,000
1.1300
1,469,000
1.6200
2,106,000
Common stock
1,800,000
1.1990
2,158,200
1.1990
2,158,200
Retained earnings
6,300,000
1.1300 (a)
7,119,000
1.1300 (b)
7,119,000
Translation adjustment(CTA)
Total
—
(124,200)
3,844,800
11,800,000
$13,334,000
$19,116,000
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earnings of all prioryears,
translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the euro.
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
14. BangkokInstruments, Ltd.(A). BangkokInstruments, Ltd., the Thai subsidiary of a U.S.corporation, is a seismic instrument
manufacturer. Bangkok Instruments manufactures the instruments primarily for the oil and gas industry globally—though with recent
commodity price increases of all kinds includingcopper, its business has begun to grow rapidly. Sales are primarily to multinational
companies based in the United States and Europe. BangkokInstruments’ balance sheet in thousands of Thai bahts(B) as of March 31 is
shown in the popupwindow: 4.
Exchange rates for translating BangkokInstruments’ balance sheet into U.S. dollarsare:
B40.00/$ April 1 exchangerate, after25% devaluation.
B30.00/$ March 31 exchangerate, before25% devaluation. All inventory was acquired at this rate.
B21.00/$ Historic exchange rate at which plant and equipment were acquired.
The Thai baht dropped in value from B30.00/$ to B40.00/$ between March 31 and April 1. Assuming no change in balance sheet accounts
between these twodays, calculate the gain or loss from translation by both the current rate method and the temporal method.
BangkokInstruments’ translated balance sheet using the current rate method is shownhere, 5, and the one using the temporal method is
shownhere, 6. Explain the translation gain or loss in terms of changes in the value of exposed accounts.
Using the translated balance sheet under the current ratemethod, 7, what is the amount of translation gain orloss? Enter a positive
number for a gain and negative for a loss.
$
(Round to the nearestdollar.)
Using the translated balance sheet under the temporalmethod, 8, what is the amount of translation gain orloss? Enter a positive number
for a gain and negative for a loss.
$
(Round to the nearestdollar.)
The (1)
results in a translationgain, as opposed to the CTA loss found under the (2)
, because of the
different exchange rates used against net plant and equipment and the inventory line items. This gain would be impossible under the
(3)
because all assets are exposed under thatmethod, whereas the (4)
and inventory at relevant historical exchange rates. (Select from thedrop-down menus.)
carries net plant and equipment
4: Data Table
BangkokInstruments, Ltd.
BalanceSheet, March 1
Liabilities& Net Worth
Assets
Cash
B22,000,000
Accounts payable
B20,000,000
Accounts receivable
38,000,000
Bank loans
58,000,000
Inventory
48,000,000
Common stock
19,000,000
Net plant& equipment
61,000,000
Retained earnings
72,000,000
B169,000,000
B169,000,000
Click on the icon located on thetop-right corner of the data table in order to copy its
contents into a spreadsheet.
5: Data Table
BangkokInstruments’ Translation Gain(Loss) After Depreciation of theBaht: Current Rate Method
March 31
Assets
In Bahts(B)
Exchange
Rate(B/$)
Cash
B22,000,000
30.00
Accounts receivable
38,000,000
30.00
Inventory
48,000,000
30.00
Net plant and equipment
61,000,000
30.00
Total
April1
Translated
Accounts($)
Exchange
Rate(B/$)
Translated
Accounts($)
$733,333
40.00
$550,000
1,266,667
40.00
950,000
1,600,000
40.00
1,200,000
2,033,333
40.00
1,525,000
$5,633,333
B169,000,000
$4,225,000
Liabilities and Net Worth
Accounts payable
B20,000,000
30.00
$666,667
40.00
$500,000
Bank loans
58,000,000
30.00
1,933,333
40.00
1,450,000
Common stock
19,000,000
21.00
904,762
21.00
Retained earnings
72,000,000
33.83 (a)
Translation adjustment(CTA)
Total
2,128,571
—
B169,000,000
904,762
33.83 (b)
2,128,571
?
?
$5,633,333
$4,225,000
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earnings of all
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the baht.
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
6: Data Table
BangkokInstruments’ Translation Gain(Loss) After Depreciation of theBaht: Temporal Method
March 31
April1
Assets
In Bahts(B)
Exchange
Rate(B/$)
Cash
B22,000,000
30.00
$733,333
40.00
$550,000
Accounts receivable
38,000,000
30.00
1,266,667
40.00
950,000
Inventory
48,000,000
30.00
1,600,000
30.00
1,600,000
Net plant and equipment
61,000,000
21.00
2,904,762
21.00
2,904,762
Total
Translated
Accounts($)
Exchange
Rate(B/$)
Translated
Accounts($)
$6,504,762
B169,000,000
$6,004,762
Liabilities and Net Worth
Accounts payable
B20,000,000
30.00
$666,667
40.00
$500,000
Bank loans
58,000,000
30.00
1,933,333
40.00
1,450,000
Common stock
19,000,000
21.00
904,762
21.00
Retained earnings
72,000,000
24.00 (a)
Translation gain(loss)
Total
—
B169,000,000
3,000,000
—
$6,504,762
904,762
24.00 (b)
3,000,000
(c)
?
$6,004,762
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earnings of all
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the baht.
(c) Under the temporalmethod, the translation gain(loss) would be closed into retained earnings through the
income statement rather than left as a separate line item as shown here.
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
7: Data Table
BangkokInstruments’ Translation Gain(Loss) After Depreciation of theBaht: Current Rate Method
March 31
Assets
In Bahts(B)
Exchange
Rate(B/$)
Cash
B22,000,000
30.00
Accounts receivable
38,000,000
30.00
Inventory
48,000,000
30.00
Net plant and equipment
61,000,000
30.00
Total
April1
Translated
Accounts($)
Exchange
Rate(B/$)
Translated
Accounts($)
$733,333
40.00
$550,000
1,266,667
40.00
950,000
1,600,000
40.00
1,200,000
2,033,333
40.00
1,525,000
$5,633,333
B169,000,000
$4,225,000
Liabilities and Net Worth
Accounts payable
B20,000,000
30.00
$666,667
40.00
$500,000
Bank loans
58,000,000
30.00
1,933,333
40.00
1,450,000
Common stock
19,000,000
21.00
904,762
21.00
Retained earnings
72,000,000
33.83 (a)
Translation adjustment(CTA)
Total
2,128,571
—
B169,000,000
904,762
33.83 (b)
2,128,571
?
?
$5,633,333
$4,225,000
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earnings of all
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the baht.
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
8: Data Table
BangkokInstruments’ Translation Gain(Loss) After Depreciation of theBaht: Temporal Method
March 31
April1
Assets
In Bahts(B)
Exchange
Rate(B/$)
Translated
Accounts($)
Exchange
Rate(B/$)
Translated
Accounts($)
Cash
B22,000,000
30.00
$733,333
40.00
$550,000
Accounts receivable
38,000,000
30.00
1,266,667
40.00
950,000
Inventory
48,000,000
30.00
1,600,000
30.00
1,600,000
61,000,000
21.00
2,904,762
21.00
Net plant and equipment
Total
2,904,762
$6,504,762
B169,000,000
$6,004,762
Liabilities and Net Worth
Accounts payable
B20,000,000
30.00
$666,667
40.00
$500,000
Bank loans
58,000,000
30.00
1,933,333
40.00
1,450,000
Common stock
19,000,000
21.00
904,762
21.00
904,762
Retained earnings
72,000,000
24.00 (a)
Translation gain(loss)
Total
—
3,000,000
24.00 (b)
3,000,000
(c)
?
—
$6,504,762
B169,000,000
$6,004,762
(a) Dollar retained earnings before depreciation are the cumulative sum of additions to retained earnings of all
prioryears, translated to exchange rates in each year.
(b) Translated into dollars at the same rate as before depreciation of the baht.
(c) Under the temporalmethod, the translation gain(loss) would be closed into retained earnings through the
income statement rather than left as a separate line item as shown here.
Click on the icon located on thetop-right corner of the data table in order to copy its contents into a spreadsheet.
(1)
temporal method
current rate method
(2)
current rate method
temporal method
(3)
current rate method
temporal method
(4)
current rate method
temporal method
15. Mauna Loa Macadamia. Mauna LoaMacadamia, a macadamia nut subsidiary ofHershey’s with plantations on the slopes of its
namesake volcano inHilo, Hawaii, exports macadamia nuts worldwide. The Japanese market is its biggest exportmarket, with average
annual sales invoiced in yen to Japanese customers of ¥2,160,000,000. At the present exchange rate of ¥125/$, this is equivalent to
$17,280,000. Sales are relatively equally distributed throughout the year. They show up as a ¥45,000,000 account receivable on
MaunaLoa’s balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically
¥180,000,000. Mauna Loa would like to hedge its yenreceipts, but it has too many customers and transactions to make it practical to sell
each receivable forward. It does not want to use options because they are considered to be too expensive for this particular
purpose.Therefore, they have decided to use a”matching” hedge by borrowing yen. Assume the annual interest rate on the loan is 4.50%.
a. How much should Mauna Loa borrow in U.S.dollars?
b. What should be the terms of payment on the yenloan?
a. How much should Mauna Loa borrow in U.S.dollars?
$
(Round to the nearestdollar.)
b. What should be the terms of payment on the yenloan? (Select the best choicebelow.)
A. Mauna Loa should borrow ¥45,000,000 accounts receivable to cover its accountingexposure, not only borrow the cash flows to cov
B. The loan should be repaid out of the monthly cashflow, with payments on both principal and interest.
C. Mauna Loa should borrow both ¥45,000,000 accounts receivable and cash flows to cover its accounting exposure and operating ex
D. The loan should be repaid out of the monthly cashflow, with payments on principal only. The interest payment one year hence has
16. Manitowoc Crane(A). Manitowoc Crane(U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently
12,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan(renminbi) has been trading at Yuan7.70/$, but a Hong
Kong advisory service predicts the renminbi will drop in value next week to Yuan8.40/$, after which it will remain unchanged for at least a
decade. Accepting this forecast asgiven, Manitowoc Crane faces a pricing decision in the face of the impending devaluation. It may
either(1) maintain the same yuan price and in effect sell for fewerdollars, in which case Chinese volume will notchange; or(2) maintain
the same dollarprice, raise the yuan price in China to offset thedevaluation, and experience a10% drop in unit volume. Direct costs
are75% of the U.S. sales price.
a. What would be theshort-run (one-year) impact of each pricingstrategy?
b. Which do yourecommend?
a. If Manitowoc Crane maintains the same yuan price and same unitvolume, what will be thefirm’s grossprofits?
$
(Round to the nearestdollar.)
If Manitowoc Crane maintains the same dollarprice, raises the yuan price in China to offset thedevaluation, and experiences a10% drop
in unitvolume, what will be thefirm’s grossprofits?
$
(Round to the nearestdollar.)
b. Which do yourecommend? (Select from thedrop-down menu.)
(1)
(1)
is better because it yields higher profits.
Case 2
Case 1
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