Question

34. Uncertainty Surrounding an MNC's Cash Flows a. Assume that Bangor Co. (a U.S. firm) knows that it will have cash inflows of $900,000 from domestic operations, cash inflows of 200,000 Swiss francs due to exports to Swiss operations, and cash outflows of 500,000 Swiss francs at the end of the year. While the future value of the Swiss franc is uncertain because it fluctuates, your best guess is that the Swiss franc's value will be $1.10 at the end this year. What are the expected dollar cash flows of Bangor Co? b. Assume that Concord Co. (a U.S. firm) is in the same industry as Bangor Co. There is no political risk that could have any impact on the cash flows of either firm. Concord Co. knows that it will have cash inflows of $900,000 from domestic operations, cash inflows of 700,000 Swiss francs due to exports to Swiss operations, and cash outflows of 800,000 Swiss francs at the end of the year. Is the valuation of the total cash flows of Concord Co. more uncertain or less uncertain than the total cash flows of Bangor Co.? Explain briefl

Answer 1

a. Expected dollar cash flow of Bangor Co. = Expected dollar cash flow from domestic operation + Expected dollar cash flow from export

Where,

Expected dollar cash flow from domestic operation = $900,000

Expected dollar cash flow from export = (expect cash inflow in Swiss francs - expect cash outflow in Swiss francs) * conversion rate ($/Swiss franc)

= (200,000 – 500,000) * $1.10

= - 300,000 * $1.10 = - $330,000

Therefore,

Expected dollar cash flow of Bangor Co. = $900,000 - $330,000

= $570,000

b. Let’s first calculate Expected dollar cash flow of Concord Co. = Expected dollar cash flow from domestic operation + Expected dollar cash flow from export

Where,

Expected dollar cash flow from domestic operation = $900,000

Expected dollar cash flow from export = (expect cash inflow in Swiss francs - expect cash outflow in Swiss francs) * conversion rate ($/Swiss franc)

= (700,000 – 800,000) * $1.10

= - 100,000 * $1.10 = - $110,000

Therefore,

Expected dollar cash flow of Concord Co. = $900,000 - $110,000

= $790,000

As the Expected cash flow from export is less for Concord Co. therefore its total cash flow is less uncertain in comparison of Bangor Co.