Universal Circuits' Case Assignment Essay

1796 Words Mar 16th, 2011 8 Pages
QUESTION #1

Does the Universal Circuits’ Irish controller have a convincing argument for the weakness of the dollar? Why or why not? How would you interpret the evidence? The controller of the Irish division does have a valid point when stating that the U.S. dollar is in a vulnerable position due to the fact that its trade deficit is currently in excess of $100 billion and growing. (see Exhibit 1). While Universal Circuits’ chief financial officer, Joe Merrill, is correct when stating that the dollar is in the middle of its twenty-year range, he never mentioned which countries currency he was comparing it to. When compared to the Irish punt, which the controller and the company have a vested interest in it is clear that over the last
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This being said, Universal Circuits’ economic exposure can affect its price competitiveness.
From class, translation risk comes from the translation of the value of the asset from the foreign currency to the domestic currency. When the Punt/US$ exchange rate changes, Universal Circuits’ assets, liabilities, revenues, and expenses have to be recalculated and restated.
According to Investopedia, transaction exposure is defined as the risk faced by companies in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for the firm. With this being said, Universal Circuit’s transaction risk is low because its sales invoices are in US dollars and on average, the affiliates pay the Irish branch in fifty five days.
Why isn’t the Irish subsidiary’s functional currency the Irish punt? Through the Abbreviated Operational Organization Chart, Exhibit 8, Universal Circuit’s Operations are divided in two: the United States and Ireland. Due to the fact that the Irish operations are directly linked to the US parent company, it would make sense that the Irish subsidiary has the US dollar as their functional currency. Furthermore, if we suppose that all expenses were indeed in punts, the Irish subsidiary would then be exposed to a higher degree of both economic and translation risk. This being said, the Irish subsidiary’s profits would be

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