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Fundamentals of Financial Manageme...

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Eugene F. Brigham + 1 other
ISBN: 9781305635937

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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MULTINATIONAL FINANCIAL MANAGEMENT Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Maitland, Florida, Yohe usually buys its raw materials in several different foreign countries using several different foreign currencies. The matter is further complicated because Yohe often sells its products in other foreign countries. One product in particular, the SY-20 radio transmitter, draws Component X, Component Y, and Component Z (its principal components) from Switzerland, France, and the United Kingdom, respectively. Specifically, Component X costs 165 Swiss francs Component V costs 20 euros, and Component Z costs 105 British pounds. The largest market for the SY-20 is Japan, where the product sells for 50,000 Japanese yen. Naturally. Yohe is intimately concerned with economic conditions that could adversely affect dollar exchange rates. You will find Tables 17.1, 17.2, and 17.3 useful for completing this problem.

  1. a. How much in dollars docs it cost Yohe to produce the SY-20? What is the dollar sale price of the SY-20?
  2. b. What is the dollar profit that Yohe makes on the sale of the SY-20? What is the percentage profit?
  3. c. If the U.S. dollar was to weaken by 10% against all foreign currencies, what would be the dollar profit for the SY-20?
  4. d. If the U.S. dollar was to weaken by 10% only against the Japanese yen and remained constant relative to all other foreign currencies, what would be the dollar and percentage profits for the SY-20?
  5. e. Using the 180-day forward exchange information from Table 173, calculate the return on 1-year securities in Switzerland assuming the rate of return on 1-year securities in the United States is 4.9%.
  6. f. Assuming that purchasing power parity (PPP) holds, what would be the sale price of the SY-20 if it was sold in the United Kingdom rather than Japan?

a.

Summary Introduction

To determine: The cost and sale price of SY-20 in dollars.

Introduction:

Exchange Rate:

The exchange rate is therate, which indicates the conversion rate for currency of a country which can be get in exchange of currency of another country.

Explanation

Refer table number 17.1 for exchange rates of given currencies in term of the US dollars.

Product cost:

Currencies

Units of

Foreign

currency

US dollars

required to

buy one unit of

given currency

US dollars required to buy

components

(Exchange rate×Foreign currency)

Swiss francs165$1.0636$175.494
Euros20$1.0993$21.986
British pounds105$1.5290$160.545
Product cost$358

b.

Summary Introduction

To determine: The profit earned by sale of SY-20 in dollars and its percentage.

Introduction:

Currency Depreciation:

It indicates the negative (decrease) change in the currency’s value in reference of any other currency due to some factors such as change in government policies, and fluctuation in interest rates.

c.

Summary Introduction

To determine: The amount of profit after dollar depreciate by 10%.

Introduction:

Currency Depreciation:

It indicates the negative (decrease) change in the currency’s value in reference of any other currency due to some factors such as change in government policies, and fluctuation in interest rates.

d.

Summary Introduction

To determine: The amount of profit earned in terms of dollars and its percentage (when dollar weaken by 10% for yen only).

e.

Summary Introduction

To determine: the rate of return of securities in S country.

Introduction:

Interest Rate Parity:

It refers to that theory which indicates the difference of interest rates provided by two different countries is to be same as the difference of two types of exchange rate which are: the forward exchange rate and the spot exchange rate.

f.

Summary Introduction

To determine: The price of product in U country (British pounds).

Introduction:

Purchasing Power Parity (PPP):

It refers to that relationship which indicates the same cost of s same kinds of products in the market of various countries after adjustment of exchange rates of currencies. This relationship of common price can be termed as the law of one price.

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