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3. PREPARE A SECOND CONSOLIDATED BALANCE SHEET FOR THE MNE USING THE EXCHANGE RATES YOU EXPECT IN THE FUTURE. DETERMINE HOW ANY REPORTING CURRENCY IMBALANCE WILL AFFECT THE NEW CONSOLIDATED BALANCE SHEET FOR THE MNE.
MINI CASE Sundance Sporting Goods Inc. Sundance Sporting Goods Inc. is a U.S. manufacturer of high-quality sporting goods-principally golf, tennis, and other racquet equipment, and also lawn sports, such as croquet and badminton-with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25= Ps3.30 = A1.00 = 105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table. You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as an MNC. She has also asked you to address in your analysis the relationship between the firm's translation exposure and its transaction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written. a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52. b. Please complete the following i. Prepare a translation exposure report for Sundance Sporting Goods Inc. and its two affiliates. ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which the firm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = 105 = W800 to $1.00 = CD1.30 = Ps3.30 = A1.03 = 105 = W800. c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC. d. Please complete the following i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures. ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged. Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican and Canadian Affiliates, December 31, 2019 (in 000 currency units) Assets Cash Accounts receivable Inventory Investment in Mexican affiliate Investment in Canadian affiliate Net fixed assets Total assets Liabilities and Net Worth Accounts payable Notes payable Long-term debt Common stock Retained earnings Sundance Inc. (Parent) poke $ 1,500 +$2.400.000. This 2,500a 5,000 2,400b 3,600c 12,000 $ 27,000 $3,000 4,000d 9,000 5,000 6,000 Mexican Affiliate Ps 1,420 2,800 6,200 11,200 Ps 21,620 Ps 2,500 4,200 7,000 4,500b 3,420b Canadian Affiliate CD 1,200 1,500 2,500 5,600 CD 10,800 CD 1,700 2,300 2,300 2,900 $ 27,000 Ps 21,620 CD 10,800 Total liabilities and net worth "The parent firm is owed Ps1,320,000 by the Mexican affiliate. This sum is included in the parent's accounts receivable as $400,000, translated at Ps3.30/$1.00. The remainder of the parent's (Mexican affiliate's) accounts receivable (payable) is denominated in dollars (pesos). "The Mexican affilia 1,600c ock (Brd 500.000) and retained earnings (R3 420.000 on the MINI CASE Sundance Sporting Goods Inc. Sundance Sporting Goods Inc. is a U.S. manufacturer of high-quality sporting goods-principally golf, tennis, and other racquet equipment, and also lawn sports, such as croquet and badminton-with administrative offices and manufacturing facilities in Chicago, Illinois. Sundance has two wholly owned manufacturing affiliates, one in Mexico and the other in Canada. The Mexican affiliate is located in Mexico City and services all of Latin America. The Canadian affiliate is in Toronto and serves only Canada. Each affiliate keeps its books in its local currency, which is also the functional currency for the affiliate. The current exchange rates are: $1.00 = CD1.25= Ps3.30 = A1.00 = 105 = W800. The nonconsolidated balance sheets for Sundance and its two affiliates appear in the accompanying table. You joined the International Treasury division of Sundance six months ago after spending the last two years receiving your MBA degree. The corporate treasurer has asked you to prepare a report analyzing all aspects of the translation exposure faced by Sundance as an MNC. She has also asked you to address in your analysis the relationship between the firm's translation exposure and its transaction exposure. After performing a forecast of future spot rates of exchange, you decide that you must do the following before any sensible report can be written. a. Using the current exchange rates and the nonconsolidated balance sheets for Sundance and its affiliates, prepare a consolidated balance sheet for the MNC according to FASB 52. b. Please complete the following i. Prepare a translation exposure report for Sundance Sporting Goods Inc. and its two affiliates. ii. Using the translation exposure report you have prepared, determine if any reporting currency imbalance will result from a change in exchange rates to which the firm has currency exposure. Your forecast is that exchange rates will change from $1.00 = CD1.25 = Ps3.30 = A1.00 = 105 = W800 to $1.00 = CD1.30 = Ps3.30 = A1.03 = 105 = W800. c. Prepare a second consolidated balance sheet for the MNC using the exchange rates you expect in the future. Determine how any reporting currency imbalance will affect the new consolidated balance sheet for the MNC. d. Please complete the following i. Prepare a transaction exposure report for Sundance and its affiliates. Determine if any transaction exposures are also translation exposures. ii. Investigate what Sundance and its affiliates can do to control its transaction and translation exposures. Determine if any of the translation exposure should be hedged. Nonconsolidated Balance Sheet for Sundance Sporting Goods, Inc. and Its Mexican and Canadian Affiliates, December 31, 2019 (in 000 currency units) Assets Cash Accounts receivable Inventory Investment in Mexican affiliate Investment in Canadian affiliate Net fixed assets Total assets Liabilities and Net Worth Accounts payable Notes payable Long-term debt Common stock Retained earnings Sundance Inc. (Parent) poke $ 1,500 +$2.400.000. This 2,500a 5,000 2,400b 3,600c 12,000 $ 27,000 $3,000 4,000d 9,000 5,000 6,000 Mexican Affiliate Ps 1,420 2,800 6,200 11,200 Ps 21,620 Ps 2,500 4,200 7,000 4,500b 3,420b Canadian Affiliate CD 1,200 1,500 2,500 5,600 CD 10,800 CD 1,700 2,300 2,300 2,900 $ 27,000 Ps 21,620 CD 10,800 Total liabilities and net worth "The parent firm is owed Ps1,320,000 by the Mexican affiliate. This sum is included in the parent's accounts receivable as $400,000, translated at Ps3.30/$1.00. The remainder of the parent's (Mexican affiliate's) accounts receivable (payable) is denominated in dollars (pesos). "The Mexican affilia 1,600c ock (Brd 500.000) and retained earnings (R3 420.000 on the
