Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
9th Edition
ISBN: 9781305635937
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 17, Problem 18SP

MULTINATIONAL FINANCIAL MANAGEMENT Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually buys its raw materials in several different foreign countries using several different foreign currencies. The matter is further complicated because Yohe often sells its products in other foreign countries. One product in particular, the SY-20 radio transmitter, draws Component X, Component Y, and Component Z (its principal components) from Switzerland, France, and the United Kingdom, respectively. Specifically, Component X costs 165 Swiss francs Component V costs 20 euros, and Component Z costs 105 British pounds. The largest market for the SY-20 is Japan, where the product sells for 50,000 Japanese yen. Naturally. Yohe is intimately concerned with economic conditions that could adversely affect dollar exchange rates. You will find Tables 17.1, 17.2, and 17.3 useful for completing this problem.

  1. a. How much in dollars docs it cost Yohe to produce the SY-20? What is the dollar sale price of the SY-20?
  2. b. What is the dollar profit that Yohe makes on the sale of the SY-20? What is the percentage profit?
  3. c. If the U.S. dollar was to weaken by 10% against all foreign currencies, what would be the dollar profit for the SY-20?
  4. d. If the U.S. dollar was to weaken by 10% only against the Japanese yen and remained constant relative to all other foreign currencies, what would be the dollar and percentage profits for the SY-20?
  5. e. Using the 180-day forward exchange information from Table 173, calculate the return on 1-year securities in Switzerland assuming the rate of return on 1-year securities in the United States is 4.9%.
  6. f. Assuming that purchasing power parity (PPP) holds, what would be the sale price of the SY-20 if it was sold in the United Kingdom rather than Japan?

a.

Expert Solution
Check Mark
Summary Introduction

To determine: The cost and sale price of SY-20 in dollars.

Introduction:

Exchange Rate:

The exchange rate is therate, which indicates the conversion rate for currency of a country which can be get in exchange of currency of another country.

Explanation of Solution

Refer table number 17.1 for exchange rates of given currencies in term of the US dollars.

Product cost:

Currencies

Units of

Foreign

currency

US dollars

required to

buy one unit of

given currency

US dollars required to buy

components

(Exchange rate×Foreign currency)

Swiss francs165$1.0636$175.494
Euros20$1.0993$21.986
British pounds105$1.5290$160.545
Product cost$358.025

Sale price:

Formula to calculate sale price in dollars:

Sale price($)=Sale price(yen)×Exchange rate

Substitute 50,000 yen for sale price in yen (given), and $0.00806 for exchange rate (refer table 17.1) in the above formula,

Sale price($)=50,000 yen×0.00806=$403

The selling price of the product in dollars is $403.

Conclusion

Hence, the product cost and sale price in terms of dollars are $358.025 and $403 respectively.

b.

Expert Solution
Check Mark
Summary Introduction

To determine: The profit earned by sale of SY-20 in dollars and its percentage.

Introduction:

Currency Depreciation:

It indicates the negative (decrease) change in the currency’s value in reference of any other currency due to some factors such as change in government policies, and fluctuation in interest rates.

Explanation of Solution

Refer part a,

The product cost is $358.025.

The sale price of product is $403.

Profit:

Formula to calculate profit:

Profit=Sale priceProduct cost

Substitute $403 for sale price, and $358.025 for product cost in the above formula.

Profit=$403$358.025=$44.975

Profit percentage:

Formula to calculate profit percentage:

Profit(%)=ProfitProduct cost×100

Substitute $44.975 for profit, and $358.025 for product cost in the above formula.

Profit(%)=$44.975$358.025×100=12.562%

Conclusion

The amount of profit earned is $44.975, and profit percentage is 12.562%.

c.

Expert Solution
Check Mark
Summary Introduction

To determine: The amount of profit after dollar depreciate by 10%.

Introduction:

Currency Depreciation:

It indicates the negative (decrease) change in the currency’s value in reference of any other currency due to some factors such as change in government policies, and fluctuation in interest rates.

Explanation of Solution

CurrenciesUnits of foreign currency

US dollars required

to buy one unit of

given currency

(Exchange rate×1.10)

US dollars required to

components

(Exchange rate×Foreign currency)

Swiss

francs

165 ($1.0636×1.10=$1.16996) ($1.16996×165=193.0434)
Euros20 ($1.0993×1.10=$1.20923) ($1.20923×20=$24.1846)
British pounds105 ($1.5290×1.10=$1.6819) ($1.6819×105=$176.5995)
Product cost$393.8275

Sale price:

Formula to calculate sale price in dollars:

Sale price($)=Sale price(yen)×Exchange rate

Substitute 50,000 yen for sale price in yen (given), and $0.008866 for exchange rate (working note) in the above formula.

Sale price($)=50,000 yen×$0.008866=$443.3

The selling price of the product in dollars is $393.498.

Profit:

Formula to calculate profit:

Profit=Sale priceProduct cost

Substitute $443 for sale price, and $393.83 for product cost in the above formula.

Profit=$443.3$393.83=$49.47

Working note:

Formula to calculate new exchange rate of yen,

Depreciated exchange rate of yen=Old exchange rate of yen×1.10=$0.00806×1.10=$0.008866

Conclusion

Hence, the amount of profit after dollar depreciates by 10% is $49.47.

d.

Expert Solution
Check Mark
Summary Introduction

To determine: The amount of profit earned in terms of dollars and its percentage (when dollar weaken by 10% for yen only).

Explanation of Solution

Refer table number 17.1 for exchange rates of given currencies in term of the US dollars.

Product cost:

Currencies

Units of

Foreign

currency

US dollars

required to

buy one unit of

given currency

US dollars required to buy

components

(Exchange rate×Foreign currency)

Swiss francs165$1.0636$175.494
Euros20$1.0993$21.986
British pounds105$1.5290$160.545
Product cost$358.025

The sale price of product in dollar (after weaken by 10%) is $443.3 (refer part c).

Profit:

Formula to calculate profit:

Profit=Sale priceProduct cost

Substitute $443.3 for sale price, and $358.025 for product cost in the above formula.

Profit=$443.3$358.025=$85.275

Profit percentage:

Formula to calculate profit percentage:

Profit(%)=ProfitProduct cost×100

Substitute $85.275 for profit, and $358.025 for product cost in the above formula.

Profit(%)=$85.275$358.025×100=23.82%

Conclusion

The amount of profit earned is $85.275, and profit percentage is 23.82%.

e.

Expert Solution
Check Mark
Summary Introduction

To determine: the rate of return of securities in S country.

Introduction:

Interest Rate Parity:

It refers to that theory which indicates the difference of interest rates provided by two different countries is to be same as the difference of two types of exchange rate which are: the forward exchange rate and the spot exchange rate.

Explanation of Solution

Given information:

The interest rate of securities in U is 4.9% or 0.049.

The spot exchange rate is 0.9247.

The 180-forward exchange rate is 0.9228.

Equation of interest rate parity,

Forwad exchange rateSpot exchange rate=(1+rh)(1+rf)

Where,

  • rh is interest rate of securities in U.
  • rf is interest rate of securities in S.

Substitute 0.9247 for spot exchange rate, 0.9228 for forward exchange rate, and 0.049 for rh in the above formula.

0.93280.9402=(1+0.049)(1+rf)0.992123=(1.049)(1+rf)rf=1(1.049)0.992123r=0.0573 or 5.73%

Conclusion

Hence, rate of return of securities in S country is 5.73%.

f.

Expert Solution
Check Mark
Summary Introduction

To determine: The price of product in U country (British pounds).

Introduction:

Purchasing Power Parity (PPP):

It refers to that relationship which indicates the same cost of s same kinds of products in the market of various countries after adjustment of exchange rates of currencies. This relationship of common price can be termed as the law of one price.

Explanation of Solution

Given information:

The cost of product in the J country is 50,000 yen.

The spot exchange rate of the one British pound in yen is 189.8101.

Equation for purchasing power parity,

(Ph)=(Pf)×Spot rate

Where,

  • Ph is price of product in home country.
  • Pf is price of product in foreign country.

Assume the home country in the given situation is the U Country.

Substitute 50,000 yen for Ph , 189.8101 for spot rate in the above formula.

50,000 yen=(Pf)×189.8101Pf=50,000 yen150.2243=332.836 British pounds 

Conclusion

Hence, the price of product in the U country is 332.836 British pounds.

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