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1. Managing economic exposure Step 1 Kittle estimates it's cash flows from both the U.S., in dollars, and Canada, in Canadian dollars, for a typical quarter. These figures are summarized in the following table. U.S. Canada Sales $325 C$5 -Cost of materials $55 C$150 -Operating expenses $65 -Interest expenses $3 C$10 Cash flows $202 -$C155 CENGAGE MINDTAP Q Search Chapter 12 Assignment Kittle believes that the value of the Canadian dollar will be either $0.70 or $0.80 and seeks to analyze its cash flows under each of these scenarios. The following table shows Kittle's cash flows under each of these exchange rates. Exchange Rate Scenario Exchange Rate Scenario C$1=$0.70 C$1=$0.80 (Millions) (Millions) Sales (1) U.S. Sales $325 $325 (2) Canadian Sales C$5 X $0.80= $4.00 C$5 X $0.70 = $3.50 $328.50 (3) Total sales in U.S. $ $329.00 Cost of Materials and Operating Expenses (4) U.S. Cost of Materials $55 $55 C$150 X $0.80 $120.00 (5) Canadian Cost of Materials C$150 X $0.70 = $105.00 (6) Total Cost of Materials in U.S. $ $160.00 $65 $175.00 $65 (7) Operating Expenses Interest Expense (9)ULE Internet Exponen 53 $3 $3 $3 C$10 X $0.70 = $7.00 (8) U.S. Interest Expense (9) Canadian Interest Expense (10) Total Interest Expenses in U.S. Cash Flows in U.S.$ before Taxes C$10 X 50.80 58.00 $10.00 $11.00 $93.50 $78.00 For Little Co., a stronger Canadian dollar has a stronger influence on Canadian dollar than it does on Canadian dollar outflows Step 2 Inflows In the previous stage, you saw that Kittie's operating structure, with low sales in Canada and high cost of materials from Canadian suppliers, was a source of significant economic exposure each quarter. Because of this, Kittle has decided to restructure it's operating structure. The largest part of the restructure involves an increase in U.S. operating expense in order to pay for efforts to increase Canadian sales, while also ordering more supplies from u.5. suppliers instead of Canadian suppliers. This restructuring also includes using more U.S. sources for financing instead of Canadian sources The following table shows Kittie's cash flows under each of these exchange rates and operating structures. Columns (1) and (3) represent the Q Search this course Chapter 12 Assignment The following table shows Kittle's cash flows under each of these exchange rates and operating structures. Columns (1) and (3) represent the original operating structures, while columns (2) and (4) represent the new, proposed operating structure... Use the table to answer the questions that follow. (1) (2) (3) (4) Exchange Rate Scenario Exchange Rate Exchange Rate Exchange Rate Scenario Scenario Scenario C$1=$0.70 C$1=$0.70 C$1=$0.80 C$1=$0.80 Proposed Proposed Original Operating Operating Original Operating Operating Structure Structure Structure Structure (Millions) (Millions) (Millions) (Millions) Sales (1) U.S. Sales $325 $325 $325 $325 (2) Canadian Sales CS5 X $0.70 $3.50 C$5 X $0.00 $4.00 C21 X 50.80- C21 X $0.70- $14.70 $16.00 $320.50 $339.70 $329.00 $341.00 (3) Total sales in U.S. s Cost of Materials and Operating Expenses (4) U.S. Cost of Materials (5) Canadian Cost of Materials (6) Total Cost of Materials in U.S. S (7) Operating Expenses Interest Expense (8) U.S. Interest Expense (9) Canadian Interest Expense (10) Total Interest Expenses in U.S. Cash Flows in U.S.$ before Taxes $55 C$150 X $0.70 = $105.00 $160.00 $65 $3 C$10 X $0.70 = $7.00 $10.00 $93.50 $145 C$75 X $0.70 = $52.50 $197.50 $67 $5 C$5 X $0.70= $3.50 $8.50 $66.70 $55 C$150 X $0.80 = $120.00 $175.00 $65 $3 C$10 X $0.80 = $8.00 $11.00 $78.00 $145 C$75 X $0.80 = $60.00 $205.00 $67 $5 C$5 X 50.80= $4.00 $9.00 $60.80 oter 12 Assignment On the following graph, use the blue points (circle symbols) to plot the U.S. dollar cash flows from the original operating structure under both exchange rate scenarios $0.70 and $0.80. Then use the orange points (square symbols) to plot the U.S. dollar cash flows from the proposed operating structure under both exchange rate scenarios $0.70 and $0.80. Plot the points from left to right in the order you want them to appear. Line segments will connect automatically. ? 100 90 Original Operating Structure -0 Proposed Operating Structure 8 Cash Flows (Millions of Dollars) BO 70 50 065 070 0.75 0.80 Exchange Rate Scenario (U.S. Dollars per Canadian Dollar) Because the line for the proposed operating structure is the U.S. dollar cash flows in the proposed operating structure are sensitive to changes in the exchange rate of the Canadian dollar when compared with the U.S. dollar cash flows of the original operating structure. Suppose that Kittle Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Kittle wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals)