Question
Richard Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information. Richard's U.S.
Richard Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information.
Richard's U.S. sales are somewhat affected by the value of the New Zealand dollar (NZ$), because it faces competition from New Zealand exporters. It forecasts the U.S. sales based on the following three exchange rate scenarios:
Exchange Rate of NZ$
Revenue from U.S. Business (in millions)
NZ$ = $.48 $100 NZ$= .50 105 NZ$= .54 110
Richard Co. revenues in New Zealand dollars are expected to be NZ$600 million.
Its anticipated cost of goods sold is estimated at $60 million from the purchase of U.S. materials and
NZ$100 million from the purchase of New Zealand materials.
Fixed operating expenses are estimated at $30 million.
Variable operating expenses are estimated at 20 percent of total sales (after including New Zealand sales, translated to a dollar amount).
Interest expense is estimated at $20 million on existing U.S. loans, and the company has no existing New Zealand loans.
Questions:
a) Create a forecasted income statement for Richard Co. under each of the three exchange rate
scenarios. (9 marks)
Also answer the following questions based on the rubric. (16 marks)
b) Discuss how Richard's projected earnings before taxes are affected by the important of
exchange rate forecasting.
c) Describe how Richard Co. can restructure its operations to reduce the sensitivity of its earnings to exchange rate movements without reducing its volume of business in New Zealand.
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