Grether FIN 4010 Assignment 6

Name: Justin Barnes

1. Complete the following table to show the impact of a local currency revaluation on a companys balance sheet relative to the 4 different translation methods we covered in class. Then answer questions a-e that follow on the next page After Revaluation (LC3=$1) Current/ Monetary/ Current Local Currency In USD (LC4 =$1) Noncurrent Nonmonetry Temporal Rate Assets Current Assets Cash, Marketable Securities And Receivables 12,000

$ 3,000

4000

4000

4000

4000

Inventory (at market) Prepaid Expenses Total Current Assets Fixed Assets Fixed Assets Less Accumulated Deprec. Goodwill Total Assets Liabilities Current Liabilities Long-Term Debt Deferred Income Tax Total Liabilities Equity Capital Stock Retained Earnings

15,000 400 27,400

$ 3,750 $ 100 $ 6,850

3750 100 7850

5000 100 9100

5000 133.33 9133.33

5000 133.33 9133.33

18,000 1,500 46,900 9,400 10,500 900 20,800 6,000 20,100

$ 4,500 $ 375

4500 375 12725 3133.33 3500 300 6933.33 1500 4291.67 12725 1000

4500 375 13975 3133.33 3500 300 6933.33 1500 5541.67 13975 2250

4500 375

6000 500

$11,725 $ 2,350 $ 2,625 $ 225

14008.33 15633.33 3133.33 2625 225 5983.33 1500 6525 3133.33 3500 300 6933.33 1500 7200

$ 5,200 $ 1,500 $ 5,025 $11,725 -

Total Liabilities & Equity 46,900 Translation Gain or Loss -

14008.33 15633.33 2283.33 3908.33

a. What is the dollar value of the companys Total Assets after the revaluation under the temporal method? __$14,008.33 b. What is the dollar value of the companys Long-Term Debt after the revaluation under the Monetary/Non-monetary method? ______$3,500______

c. Which of the translation methods had the least impact on retained earnings? ___Monetary____ d. Under which translation method did inventory remain unchanged following the revaluation? ____Current/noncurrent____ e. Which translation method do you think is best? Why? I think the current rate is the best because, all the rates are translated to the todays current rate. So all you get all the information faster cause it updated everyday.

2. You have entered into a commercial contract with a supplier and now have a 3,000,000 account payable due 6 months from today. Todays spot rate is $1.2700/ and the 180-day forward rate is $1.2800/. Interest rates on the Euro are 7.0% and interest rates on the US dollar are 7.2%. You can purchase call option contracts on 62,500 with a strike price of $1.2850 for $16.00 each. a. What is the net dollar value of this payable using a forward market hedge? 3.000.000 X 1.27 = 3.810.000 b. What is the net dollar value of this payable using a money market hedge? 3.000.000 / 1.07 = 2.803.738,318 invest 2.803.738,318 x 1.28 =3.588.785,047 borrowed 3.588.785,047 x 1.072 = 3.847.177,57 repay c. What is the net dollar value of this payable using an option hedge? 3.000.000/62.500= 48 x 16 = $768 d. If the spot rate 6 months from now is $1.2750, which of the three hedges would be most cost effective? Fwd Market edge: 3.000.000 x 1.2750 = 3.825.000 Money market edge: 3.000.000 / 1.07 = 2.803.738,318 invest 2.803.738,318 x 1.2750 =3.574.766,355 borrowed 3.574.766,355 x 1.072 = 3.832.149, 533 repay Option hedge : 3,000,000/62,500=48*16=$768 The most cost effective one here is Fwd market edge. e. If the spot rate 6 months from now is $1.3000, which of the three hedges would be most cost effective? Fwd market edge: 3.000.000 x 1,30 = 3.900.000 money market edge: 3.000.000 / 1.07 = 2.803.738,318 invest 2.803.738,318 x 1,30 = 3.644.859,813 borrowed 3.644.859,813 x 1,072 = 3.907.289,72 repay option hedge: 3,000,000/62,500=48*16=$768 the most cost effective is money market edge

3. The Acme Co expects to see unit sales growth of 12% each year from its Mexican subsidiary, Acme S.A. 50% of Acme S.As cost of goods sold and 10% of its operating expenses are in US dollars. One third of all unit sales are made to the United States on long term dollar-priced fixed contracts. All other costs and revenues are in Mexican pesos and the current exchange rate is $.10/p. Operating expenses will not rise until sales volume doubles from current levels. Use the following first-year pro-forma income statement to construct year 2 and 3 proforma to find the NPV of Acmes estimated 3-year cash flow assuming a discount rate of 15%. Year 1 (Unit sales = 12,000 x Unit price = p300) p 3,600,000. p 1,200,000. p 1,000,000. p 500,000 p 500,000. p 400,000. p 120,000 p 280,000 p 500,000 p 780,000 $ 78,000 Year 2 p4,032,000 1,344,000 1,000,000 500,000 500,000 688,000 206,400 481,600 500,000 981,600 98,160 Year 3 p4,515,840 1,505,280 1,000,000 500,000 500,000 1,010,560 303,168 707,392 500,000 1,207,392 120,739

Revenue

Cost of goods sold Operating Expenses Depreciation Fixed Expenses Net Income before Tax - Income Tax @30% = Net Income after tax + Depreciation = net cash flow in Pesos = net cash flow in USD

a. What is the NPV of the three year cash flow estimate? The NPV is $221,420.56 <WRONG (78,000/1.15 + 98,160/1.15+120,739/1.15 (221,437) b. Assume that everything else stays constant but the peso is now expected to depreciate to $.08/p beginning in year 2. What is the net effect on the $ NPV of Acme S.As operations? (in order to figure it out take the dollar amount and divide it by (.08) example for COGS take 134400 (1,344,000) and / by .08 equals 1,512,000.) ***You have to separate them to make it easier on myself. *** The net effect on the $NPV of Acme S.As operations is 221,420.56-190,701.67 = $30,718.89