Question
6. Kramerica Company does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information.
6. Kramerica Company does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information. Today's exchange rate is S = 0.50 USD/NZD. a. Kramerica's U.S. sales are somewhat affected by the value of the New Zealand dollar (NZD), because it faces competition from New Zealand exporters. It forecasts the U.S. sales based on the following three exchange rate scenarios: Exchange Rate of NZD Revenue from U.S. Business (in millions) 0.48 USD/NZD USD 100 0.50 USD/NZD USD 105 USD 110 0.54 USD/NZD b. Its New Zealand dollar revenues on sales to New Zealand invoiced in New Zealand dollars are expected to be NZD 600 million. c. Its anticipated cost of goods sold is estimated at USD 200 million from the purchase of U.S. materials and NZD 100 million from the purchase of New Zealand materials. d. Fixed operating expenses are estimated at USD 30 million. e. Variable operating expenses are estimated at 20 percent of total sales (after including New Zealand sales, translated to a dollar amount). f. Interest expense is estimated at USD 20 million on existing U.S. loans, and the company has no existing New Zealand loans. i. Create a forecasted income statement for Kramerica Co. under each of the three exchange rate scenarios. Explain how Kramerica's projected earnings before taxes are affected by possible exchange rate movements. ii. Calculate the CF elasticity (to changes in S). Interpret the CF elasticity. iii. Explain how it can restructure its operations to reduce the sensitivity of its earnings to exchange rate movements without reducing its volume of business in New Zealand.
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