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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

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 France, Component Y 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 19.1, 19.2, and 19.3 useful for completing this problem.

  1. a. How much in dollars does 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 19.3, calculate the return on 1-year securities in Switzerland assuming the rate of return on l·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 incurred by Company Y to produce the SY-20 in dollars.

Introduction:

Exchange rate is the rate, which indicates the conversion rate for currency of a country which can be getting in exchange of currency of another country.

Explanation

Given information:

Exchange rates of given currencies in term of the Country U dollars are as follows:

Summary Introduction

To determine: The sale price in dollar.

Introduction:

Exchange rate is the rate, which indicates the conversion rate for currency of a country which can be getting in exchange of currency of another country.

b)

Summary Introduction

To determine: The profit earned by sale of SY-20 in dollar.

Summary Introduction

To determine: The percentage of profit.

c)

Summary Introduction

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

Introduction:

Currency depreciation 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.

f)

Summary Introduction

To determine: The price of product in UK country (pounds) instead of Country J.

Introduction:

Purchasing Power Parity (PPP) 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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