Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Managing Economic Exposure St. Paul Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the

Managing Economic Exposure St. Paul Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information.

EXCHANGE RATE OF NZ$ REVENUE FROM U.S. NZ$ BUSINESS (IN MILLIONS)

NZ$ = $.48 $100 NZ$ = .50 105 NZ$ = .54 110

a. St. Pauls U.S. sales are somewhat affected by the value of the New Zealand dollar (NZ$) because it faces competition from New Zealand exporters. It forecasts the U.S. sales based on the following three exchange rate scenarios:

b. Its New Zealand dollar revenues on sales to New Zealand invoiced in New Zealand dollars are expected to be NZ$600 million.

c. Its anticipated cost of materials is estimated at $200 million from the purchase of U.S. materials and NZ $100 million from the purchase of New Zealand materials.

d. Fixed operating expenses are estimated at $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 $20 million on existing U.S. loans, and the company has no existing New Zealand loans.

Forecast net cash flows for St. Paul Co. under each of the three exchange rate scenarios. Explain how St. Pauls net cash flows are affected by possible exchange rate movements. Explain how it can restructure its operations to reduce the sensitivity of its net cash flows to exchange rate movements without reducing its volume of business in New Zealand.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

New Issues In Financial Institutions Management

Authors: F Fiordelisi, P Molyneux, D Previati

2010th Edition

0230278108, 978-0230278103

More Books

Students also viewed these Finance questions

Question

Write a Python program to check an input number is prime or not.

Answered: 1 week ago