Question

Which of these statements is not true regarding operating exposure:

Select one:

a. The degree of operating exposure will likely be much greater for a firm involved in international business than for a purely domestic firm.

b. The impact of a change in the local currency on inflow and outflow variables can sometimes be indirect and therefore different from what is expected.

c. All of these statements are true.

d. Generally, depreciation of the firm's local currency causes a decrease in both cash inflows and outflows.

e. Even purely domestic firms can be affected by operating exposure.

Answer 1

The statement with is not true is the statement "d".

The depreciation of the firm's local currency will not generally cause a decrease in both cash inflows and outflows.

If the firm is purely domestic then depreciation in the local currency will increase cash inflows because the imports will become costlier and so the demand for the local product will increase thus increasing the cash inflow.

If the firm is involved in international business then also depreciation in the local currency will increase cash inflows because this will make the exports cheaper so the demand for the exports will rise thus there will be an increase in the inflow of cash.

Since statement "d" is not true so simultaneously statement "c" shall also not be true since it says that all statements are true.