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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

EXCHANGE GAINS AND LOSSES You are the vice president of International InfoXchange, headquartered in Chicago, Illinois. All shareholders of the firm live in the United States. Earlier this month you obtained a loan of 5million Canadian dollars from a bank in Toronto to finance the construction of a new plant in Montreal. At the time the loan was received, the exchange rate was $0 92 to the Canadian dollar. By the end of the month, it has unexpectedly dropped to $0 82. Has your company made a gain or a loss as a result, and by how much?

Summary Introduction

To determine: The amount of gain or loss due to change in exchange rate.

Introduction:

Exchange Rate: The rate, which indicates the conversion rate for the currency of a country, which can get in exchange for currency of another country, is the exchange rate.

Explanation

Calculate info (working note),

The loan amount in US dollar at old exchange rate ($0.92) is $4,600,000.

The loan amount in US dollar at new exchange rate ($0.82) is $4,100,000.

Formula to calculate gain or loss,

Gain/loss=(Loan amount at old exchange rateLoan amount at new exchange rate)

Substitute $4,600,000 for loan amount at old exchange rate, and $4,100,000 for loan amount at new exchange rate in the above formula.

Loss=$4,600,000$4,100,000=$500,000

Therefore, the amount of loss bear by company due to decrease in exchange rate (from $0.92 to $0.82) is $500,000.

Working Note:

Given,

The amount of loan is 5,000,000.

The old exchange rate of C country dollar in the US dollar is $0.92.

The new (decreased) exchange rate of C country dollar in the US dollar is $0.82

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