1.Measuring Economic Exposure. Assume you live in the U.S. Using the following cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and net cash flow would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$):

1) NZ$ = $.50,

2) NZ$ = $.55, and

3) NZ$ = $.60.

It expected that all of DeKalb U.S. revenues, costs and expenses will grow by 1.5 %

per year

After the three scenarios have been completed try to provide a model equation in the

form of

PCF_t = a₀ + a₁e_t + m_t ,to predict percentage changes in the companys cash flow

based on

percentage change in the New Zealand dollar.15 Marks

Note: PCF_tis the percentage change in inflation-adjusted cash flows measured in the firm's home currency (U.S. dollars) over period t, and e_t is the percentage change in the exchange rate of the foreign currency over period t.

Forecasted Net Cash Flows:DeKalb Inc.

(in millions of U.S. dollars and New Zealand dollars)

New Zealand

U.S. BusinessBusiness

Sales$800NZ$800

Cost of Materials500100

Operating Expenses3000

Interest Expense1000

Cash Flow ($100)NZ$700