Multinational Financial Management Problem Set 14 1. Consider the following balance sheet in Canadian dollars for Def Leppard, a Canadian subsidiary of the U.S. firm, Hysteria Inc. Cash C$ 2,000,000 Accounts receivable 2,000,000 Inventory 5,000,000 Net property and equipment 10,000,000 C$ 19,000,000 Accounts payable Long-term debt Common stock Retained earnings C$ 3,500,000 6,500,000 4,000,000 5,000,000 C$ 19,000,000 Assume the Canadian dollar increases in value from an exchange rate of C$1.5562/US$ to C$1.3324/US$. a) What translation method should be used to translate Def Leppard's financial statements if the Canadian dollar is deemed to be the functional currency? i) Temporal method ii) Current rate method 111) Functional method iv) No translation is necessary since the dollar is the functional currency. b) Under the current rate method, what is net exposed assets (liabilities) for Def Leppard in Canadian dollars? c) Under the temporal method, what is net exposed assets (liabilities) for Def Leppard in Canadian dollars? d) What will be the dollar translation gain (loss) from the change in the value of the Canadian dollar under the current rate method? e) What will be the dollar translation gain (loss) from the change in the value of the Canadian dollar under the temporal method? f) Where will the gain (loss) be reflected on Hysteria's financial statements under the current rate method? Multinational Financial Management Problem Set 14 1. Consider the following balance sheet in Canadian dollars for Def Leppard, a Canadian subsidiary of the U.S. firm, Hysteria Inc. Cash C$ 2,000,000 Accounts receivable 2,000,000 Inventory 5,000,000 Net property and equipment 10,000,000 C$ 19,000,000 Accounts payable Long-term debt Common stock Retained earnings C$ 3,500,000 6,500,000 4,000,000 5,000,000 C$ 19,000,000 Assume the Canadian dollar increases in value from an exchange rate of C$1.5562/US$ to C$1.3324/US$. a) What translation method should be used to translate Def Leppard's financial statements if the Canadian dollar is deemed to be the functional currency? i) Temporal method ii) Current rate method 111) Functional method iv) No translation is necessary since the dollar is the functional currency. b) Under the current rate method, what is net exposed assets (liabilities) for Def Leppard in Canadian dollars? c) Under the temporal method, what is net exposed assets (liabilities) for Def Leppard in Canadian dollars? d) What will be the dollar translation gain (loss) from the change in the value of the Canadian dollar under the current rate method? e) What will be the dollar translation gain (loss) from the change in the value of the Canadian dollar under the temporal method? f) Where will the gain (loss) be reflected on Hysteria's financial statements under the current rate method
