My answers as incorrect, please help! :)
19. 20. Assume that the subsidiary keeps sales price and cost per unit in Swiss franc unchanged and the price elasticity of demand for the product in the Eurozone is 2. What is the PV of the expected operating cash flows from the Swiss subsidiary after the exchange rate changed? Your answer: (5 . (Keep two decimals.) Assume that the subsidiary chooses to price to market and keeps its sales price per unit in euro unchanged, and everything else the same. What is the PV of the expected operating cash ows from the Swiss subsidiary after the exchange rate changed? 5,045,007.63 Your answer: . (Keep two decimals.) Refer to the following information for Questions 17 to 20. A German company has a subsidiary in Switzerland. The subsidiary produces a particular product in Switzerland and sells it in the Eurozone. At the beginning of 2015, the exchange rate between the euro and the Swiss franc (Fr) is Fr1.20/E. The expected cash flows (the baseline case) from the Swiss subsidiary for the next five years are presented in the table below. Assumptions 2015 2016 2017 2018 2019 Sales volume (units) 1,000,000 1,000,000 1,000,000 1,000,000 ,000,000 Sales price per unit Fr. 12.80 Fr. 12.80 Fr. 12.80 Fr. 12.80 Fr. 12.80 Direct cost per unit Fr. 9.60 Fr. 9.60 Fr. 9.60 Fr. 9.60 Fr. 9.60 Swiss corporate tax rate 29.5% 29.5% 29.5% 29.5% 29.5% Exchange rate (Fr/() 1.2000 1.2000 1.2000 1.2000 1.2000 Income Statement 2015 2016 2017 2018 2019 Sales revenue Fr. 12,800,000 Fr. 12,800,000 Fr. 12,800,000 Fr. 12,800,000 Fr. 12,800,000 Direct cost of goods sold 9,600,000 -9,600,000 -9,600,000 -9,600,000 -9,600,000 Cash operating expenses (fixed) -890,000 -890,000 -890,000 -890,000 -890,000 Depreciation -600,000 -600,000 -600,000 -600,000 -600,000 Pretax profit Fr. 1,710,000 Fr. 1,710,000 Fr. 1,710,000 Fr. 1,710,000 Fr. 1,710,000 Income tax expense -504,450 -504,450 -504,450 -504,450 -504,450 Net income Fr. 1,205,550 Fr. 1,205,550 Fr. 1,205,550 Fr. 1,205,550 Fr. 1,205,550 Operating Cash Flows Net income Fr. 1,205,550 Fr. 1,205,550 Fr. 1,205,550 Fr. 1,205,550 Fr. 1,205,550 Add back depreciation 600,000 600,000 600,000 600,000 600,000 Changes in net working capital Cash flow from operations Fr. 1,805,550 Fr. 1,805,550 Fr. 1,805,550 Fr. 1,805,550 Fr. 1,805,550 Cash flow from operations, in euro E 1,504,625 E 1,504,625 6 1,504,625 ( 1,504,625 ( 1,504,625 Present Value @ 15% E 5,043,736 Assume that the subsidiary has no change in net working capital. Cash operating expenses and depreciation are given. Cost of capital remains constant. 17. On January 15, 2015, the Swiss National Bank (SNB) removes the exchange rate cap and the euro falls immediately to Fr1.00/E and is expected to stay at around this level for the feasible future. Assuming complete exchange rate pass-through, what is the relative price of Swiss exports in the Eurozone? Your answer: 6052483 (Keep two decimals.) 18. Assuming that the inflation rates in the Eurozone and in Switzerland have been 1.5% and are expected to remain at 1.5% for the foreseeable future, what is the real exchange rates of the Swiss franc after January 15, 2015? or 0.83 Your answer: 1.44 (Keep two decimals.) Fr/Euro 5
