666 Appendix B: Supplemental Cases Chapter 12 Madison, Inc. Assessing Economic Exposure The situation for Madison, Inc., was described in this chapter to illustrate how alterna- tive operational structures could affect economic exposure to exchange rate move. ments. Ken Moore, the vice president of finance at Madison, Inc, was seriously considering a shift to the proposed operational structure described in the text. He was determined to stabilize the earnings before taxes and believed that the proposed approach would achieve this objective. The firm expected that the Canadian dollar would consistently depreciate over the next several years. Over time, its forecasts have been very accurate. Moore paid little attention to the forecasts, stating that regardless of how the Canadian dollar changed, future earnings would be more stable under the proposed operational structure. He also was constantly reminded of how the strength- ened Canadian dollar in some years had adversely affected the firm's earnings. In fact, he was somewhat concerned that he might even lose his job if the adverse effects from economic exposure continued. a. Would a revised operational structure at this time be in the best interests of the shareholders? Would it be in the best interests of the vice president? b. How could a revised operational structure be feasible from the vice president's per- spective but not from the shareholders' perspective? Explain how the firm might be able to ensure that the vice president will make decisions related to economic exposure that are in the best interests of the shareholders. 666 Appendix B: Supplemental Cases Chapter 12 Madison, Inc. Assessing Economic Exposure The situation for Madison, Inc., was described in this chapter to illustrate how alterna- tive operational structures could affect economic exposure to exchange rate move. ments. Ken Moore, the vice president of finance at Madison, Inc, was seriously considering a shift to the proposed operational structure described in the text. He was determined to stabilize the earnings before taxes and believed that the proposed approach would achieve this objective. The firm expected that the Canadian dollar would consistently depreciate over the next several years. Over time, its forecasts have been very accurate. Moore paid little attention to the forecasts, stating that regardless of how the Canadian dollar changed, future earnings would be more stable under the proposed operational structure. He also was constantly reminded of how the strength- ened Canadian dollar in some years had adversely affected the firm's earnings. In fact, he was somewhat concerned that he might even lose his job if the adverse effects from economic exposure continued. a. Would a revised operational structure at this time be in the best interests of the shareholders? Would it be in the best interests of the vice president? b. How could a revised operational structure be feasible from the vice president's per- spective but not from the shareholders' perspective? Explain how the firm might be able to ensure that the vice president will make decisions related to economic exposure that are in the best interests of the shareholders
