Question

1. Measuring Economic Exposure. Using the following cost and revenue information shown for DeKalb, Inc., determine how the total cash flow in USD would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1) NZ$ = $.50, (2) NZ$ = $.55, and (3) NZ$ = $.60. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Please also calculate the economic exposure of the firm.

Forecasted Net Cash Flows: DeKalb Inc.

(in millions of U.S. dollars and New Zealand dollars)

                                                                                                                                New Zealand

                                                                                            U.S. Business                   Business

      Sales                                                                                    $800                           NZ$800

      Cost of Materials                                                                     500                                  100

      Operating Expenses                                                                300                                      0

      Interest Expense                                                                     100                                      0

      Cash Flow                                                                          –$100                           NZ$700

Answer 1

the table shows that there is a severe affect on the company due to the wal dollar.business generally has high revenue in (NZ$) as compared to expenses(NZ$)