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Assume that you are a Financial Manager of Starbucks Coffee, Inc., a multi-national corporation. You are in charge of determining the impact of exchange rate

Assume that you are a Financial Manager of Starbucks Coffee, Inc., a multi-national corporation. You are in charge of determining the impact of exchange rate changes on the firm. Changes in currency exchange affect both the balance sheet and the income statement. The balance sheet impact occurs when the value of international assets are translated to U.S. dollars. The values of those assets change as the exchange rate changes. The value of costs, revenue, and profit also are impacted on the income statement because of exchange rate risk. Consider that Starbucks has the following investments in coffee bean production and processing:

Table One:

Country

Value (in millions of U.S. dollars)

Columbia

$75

Kenya

$100

Papua New Guinea

$80

The expense of all the labor, production, and beans will require the following foreign currency amounts during the current year:

Table Two:

Country

Cash Flow (in millions)

Columbia

78,180 pesos

Kenya

3,200 shilling

Papua New Guinea

100 kina

Starbucks Coffee has also invested in store facilities to sell coffee products. The countries and the value of the investments are as follows:

Table Three:

Country

Value (in millions of U.S. dollars)

Canada

$200

Japan

$100

United Kingdom

$150

The Net Profit from these countries during the current year is as follows:

Table Four:

Country

Cash Flow (in millions)

Canada

80 Canadian dollars

Japan

7,200 Japanese yen

United Kingdom

30 British pounds

The current spot exchange rates per one U.S. dollar are as follows:

Table Five:

Country

Currency per one U.S. dollar:

Columbia

2,204.50 Columbian pesos

Kenya

69.480 Kenyan shilling

Papua New Guinea

3.0189 Papua New Guinea kina

Canada

1.1690 Canadian dollar

Japan

117.04 Japanese yen

United Kingdom

.5182 British pound

3. Some sharing of raw materials occurs between the coffee bean production facilities located in Columbia and Kenya. Calculate the currency cross-rate between Columbian pesos and Kenyan shilling (i.e., how may Columbian pesos can be purchased with a single Kenyan shilling?).

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