HOMEWORK PROBLEMS

HOMEWORK PROBLEMS

Which of the following is an example of economic exposure but not an example of transaction exposure?

		An increase in the dollar’s value hurts a U.S. firm’s domestic sales because foreign competitors are able to increase their sales to U.S. customers.
		An increase in the pound’s value increases the U.S. firm’s cost of British pound payables.
		A decrease in the peso’s value decreases a U.S. firm’s dollar value of peso receivables.
		A decrease in the Swiss franc’s value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.

When evaluating international project cash flows, which of the following factors is relevant?

		future inflation.
		blocked funds.
		exchange rates.
		all of the above

It is generally least difficult to effectively hedge various types of:

		translation exposure.
		transaction exposure.
		economic exposure.
		A and C

In general, increased investment by the parent in the foreign subsidiary causes more exchange rate exposure to the parent over time because the cash flows remitted to the parent will be larger.

 True

 False

Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreign revenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar.

		benefit from; be unaffected by
		benefit from; be adversely affected by
		be unaffected by; be adversely affected by
		be unaffected by; benefit from
		benefit from; benefit from

Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm’s reported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.

		be reduced; purchasing
		be reduced; selling
		increase; selling
		increase; purchasing

Any restructuring of operations that ____ the difference between a foreign currency’s inflows and outflows may ____ economic exposure.

		reduces; increase
		increases; reduce
		reduces; reduce
		A and B
		none of the above

When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary’s perspective, which variable will most likely influence the capital budgeting analysis?

		the withholding tax rate.
		the euro’s exchange rate.
		the U.S. tax rate on earnings remitted to the U.S.
		the German government’s tax rate.
		A and C

Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.

		decreasing foreign revenues; decreasing foreign expenses
		decreasing foreign revenues; increasing foreign expenses
		increasing foreign revenues; decreasing foreign revenues
		decreasing foreign expenses; increasing foreign revenues

Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominated expenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategy would ____ the Sycamore’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar.

		reduce; high
		reduce; low
		increase; low
		increase; high

 

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