Mki - Chapter 12 Assignment

INTERNATIONAL FINANCIAL MANAGEMENT
“Chapter 12: Managing Economic Exposure &

Translation Exposure ”
Firda Nurul Sulaini

120310203004
Supporting Lecturer:
Prof. Mokhamad Anwar, M.Si., PhD,
MARCH 2022
MANAGEMENT STUDY PROGRAM
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF PADJADJARAN
9. Comparing Degrees of Economic Exposure. Carlton Co. and Palmer, Inc., are U.S.-based MNCs with
subsidiaries in Mexico that distribute medical supplies (produced in the United States) to customers
throughout Latin America. Both subsidiaries purchase the products at cost and sell the products at 90
percent markup. The other operating costs of the subsidiaries are very low. Carlton Co. has a research and
development center in the United States that focuses on improving its medical technology. Palmer, Inc.,
has a similar center based in Mexico. The parent of each firm subsidizes its respective research and
development center on an annual basis. Which firm is subject to a higher degree of economic exposure?
Explain.
ANSWER: Due to the lack of significant cost offsets in Mexico and the research & development center
based in the United States, Carlton Company is more exposed to economic risk. While Palmer Inc. spends
money on its research and development facility in Mexico.
10. Comparing Degrees of Translation Exposure. Nelson Co. is a U.S. firm with annual export sales to
Singapore of about S$800 million. Its main competitor is Mez Co., also based in the United States, with a
subsidiary in Singapore that generates about S$800 million in annual sales. Any earnings generated by the
subsidiary are reinvested to support its operations. Based on the information provided, which firm is
subject to a higher degree of translation exposure? Explain.
ANSWER: Nelson Company's exposure to exchange rate fluctuations would not be categorized as
translation exposure because it does not have any subsidiaries. On the other hand, Mez Company is
exposed to translation because it has subsidiaries
11. ANSWER
Forecasted Net Cash Flows for St. Paul Company (Figures are in millions)
NZ$ = $.48 NZ$ = $.50 NZ$ = $.54
Sales
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
Total $248 $250 $254
Operating expenses
U.S.: Fixed $30 $30 $30
U.S.: Variable 78 81 87
(20% of total sales)
Total $108 $111 $117
Interest expense
U.S. $ 20 $ 20 $ 20

Total $ 20 $ 20 $ 20
Net Cash Flows $ 12 $ 24 $ 43
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.
12. Alaska Inc. plans to create and finance a subsidiary in Mexico that produces computer components at
a low cost and exports them to other countries. It has no other international business. The subsidiary will
produce computers and export them to Caribbean islands and will invoice the products in U.S. dollars.
The values of the currencies in the islands are expected to remain very stable against the dollar. The
subsidiary will pay wages, rent, and other operating costs in Mexican pesos. The subsidiary will remit
earnings monthly to the parent.
a. Would Alaska’s cash flows be favorably or unfavorably affected if the Mexican peso depreciates over
time?
b. Assume that Alaska considers partial financing of this subsidiary with peso loans from Mexican banks
instead of providing all the financing with its own funds. Would this alternative form of financing
increase, decrease, or have no effect on the degree to which Alaska is exposed to exchange rate
movements of the peso?
ANSWER:
a. Alaska's cash flows would benefit because it can occasionally convert dollars to fulfill its
expenses in pesos and only has cash outflows in pesos.
b. The subsidiary of Alaska has already experienced peso cash outflows and zero peso cash inflows.
The cash outflows in pesos would rise as a result of the partial financing in pesos, increasing the
exposure to a potential peso appreciation.

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INTERNATIONAL FINANCIAL MANAGEMENT

“Chapter 12: Managing Economic Exposure &

Firda Nurul Sulaini

New Zealand NZ$0 = 0 NZ$0 = 0 NZ$0 = 0

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