Build a Model: Multinational Financial Management Start with the partial model in the file Ch17 P15 Build a Model.xlsx on the textbooks Web site. Mark Collins, luthier and businessman, builds and sells custom-made acoustic and electric stringed instruments. Although located in Maryville, Tennessee, he purchases raw materials from around the globe. For example, he constructs his top-of-the line acoustic guitar with onboard electronics, the MC-28, from rosewood and mahogany imported from a distributor in Mexico, spruce harvested in and imported from Canada, and ebony and the electronics imported from a Japanese distributor. He obtains other parts in the United States. When broken down on a per-guitar basis, the component and finishing costs are as follows:

Rosewood and mahogany: 2,750

Mexican pesos Spruce: 200

Canadian dollars

Ebony and electronics: 12,400 Japanese yen

Other parts plus woodworking labor: $600

Collins sells some of this model in the United States, but the majority of the units are sold in England, where he has developed a loyal following and the guitars have become something of a cult symbol. There, his guitars fetch 1,600, excluding shipping. Mark is concerned about the effect of exchange rates on his materials costs and profit.

You will find Tables 17-1 and 17-2 useful for this problem.

1. How much, in dollars, does it cost for Collins to produce his MC-28? What is the dollar sale price of the MC-28 sold in England?

2. What is the dollar profit that Collins makes on the sale of the MC-28? What is the percentage profit?

3. If the U.S. dollar were to depreciate by 10% against all foreign currencies, what would be the dollar profit for the MC-28?

4. If the U.S. dollar were to depreciate by 10% only against the pound and remain constant relative to all other foreign currencies, what would be the dollar and percentage profits for the MC-28?

5. The rate of return on 90-day U.S. Treasury securities is 3.9%, and the rate of return on 90-day U.K. risk-free securities is 5.0%. Using the spot exchange information from Table 17-1, estimate the 90-day forward exchange rate.

6. Assuming that purchasing power parity (PPP) holds, what would be the sale price of the MC-28 if it were sold in France rather than in England? (Hint: Assume England is the home country.)