Assessing Translation Exposure Kanab Co. and Zion Co. are U.S. companies of approximately the same size that engage in much business within the United States. Both conduct some international business as well.
Kanab Co. has a subsidiary in Canada that will generate earnings of approximately C$20 million in each of the next five years. Kanab also has a U.S. business that will receive approximately C$1 million (after costs) in each of the next five years as a result of exporting products to Canada that are denominated in Canadian dollars. Zion Co. has a subsidiary in Mexico that will generate earnings of approximately 1 million pesos in each of the next five years. Zion also has a business in the United States that will receive approximately 300 million pesos (after costs) in each of the next five years as a result of exporting products to Mexico that are denominated in Mexican pesos.
The salvage value of Kanab’s Canadian subsidiary and Zion’s Mexican subsidiary will be zero in five years. The spot rate of the Canadian dollar is $0.60 and the spot rate of the Mexican peso is $0.10. Assume the Canadian dollar could appreciate or depreciate against the U.S. dollar by approximately 8 percent in any given year, while the Mexican peso could appreciate or depreciate against the U.S. dollar by approximately 12 percent in any given year. Which company is subject to a higher degree of translation exposure? Explain.
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