ZuoTi.Pro
Question

You are the CFO of a U.S. firm. The firm’s wholly owned subsidiary in Mexico manufactures...

You are the CFO of a U.S. firm. The firm’s wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary is financed by bank borrowings in the U.S. One of your analysts tells you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. Analyze this situation and discuss your actions.

business   Operations-Management   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Subsidiary in mexico has borrowings in dollar, means it will have to make interest payment in dollar. If mexican peso depreciates by 30% against US dollar than more unit of mexico peso will be needed to buy one unit of US dollar and thus there will be more outflow of mexican peso.

To mitigate this risk one can buy forward contract on US Dollar or can buy call option on US dollar ( This will give right to company to buy dollar at pre determined rates) thus protecting oneself from appreciation of US Dollar

0 0
Add a comment
Know the answer?
Add Answer to:
You are the CFO of a U.S. firm. The firm’s wholly owned subsidiary in Mexico manufactures...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • On January 2, 2019, Maddox Corporation, headquartered in the U.S., established a wholly- owned subsidiary in...

    On January 2, 2019, Maddox Corporation, headquartered in the U.S., established a wholly- owned subsidiary in Mexico City. An initial investment of P10,000,000 was made on that date; the exchange rate was $0.05/peso. During 2019, the following cash transactions occurred at the Mexico City subsidiary. All amounts are in pesos (P). Facilities Costs (01/02; 5 year life) (P) 1,000,000 Purchase of office equip (04/01; 10 year life) (P) 300,000 Sales (P) 12,000,000 Merchandise purchases (P) 9,000,000 Operating expenses (P) 3,000,000...

  • Solo Co. Ltd. located in Mexico City is a wholly owned subsidiary of Partner Inc., a U.S. company. At the beginning of t...

    Solo Co. Ltd. located in Mexico City is a wholly owned subsidiary of Partner Inc., a U.S. company. At the beginning of the year, Solo’s condensed balance sheet was reported in Mexican pesos (MXP) as follows: Assets 3,490,000 Liabilities 2,900,000 Stockholders’ Equity 590,000 During the year, the company earned income of MXP270,000 and on November 1 declared dividends of MXP125,000. The Mexican peso is the functional currency. Relevant exchange rates between the peso and the U.S. dollar follow: January 1...

  • Problem 15.3A Exchange Rates and Performance Evaluation (LO15-4) A U.S.-based company, Global Products Inc., has wholly...

    Problem 15.3A Exchange Rates and Performance Evaluation (LO15-4) A U.S.-based company, Global Products Inc., has wholly owned subsidiaries across the world. Global Products Inc. sells products linked to major holidays in each country. The president and board members of Global Products Inc. believe that the managers of their wholly owned country-level subsidiaries are best motivated and rewarded with both annual salaries and annual bonuses. The bonuses are calculated as a predetermined percentage of pretax annual income. Señora Larza, the president...

  • 1-year forward exchange rate, U.S. dollars required to buy 1 peso $0.12 Annual depreciation rate of peso against...

    1-year forward exchange rate, U.S. dollars required to buy 1 peso $0.12 Annual depreciation rate of peso against dollar 5.00% Peso-denominated dividend annual growth rate 10.00% Number of common shares owned 5,000,000 Cost of equity, rs 15.00% Chapman, Inc.'s Mexican subsidiary, V. Gomez Corporation, is expected to pay to Chapman 50 pesos in dividends in 1 year after all foreign and U.S. taxes have been subtracted. The exchange rate in 1 year is expected to be $0.12 per peso. After...

  • Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for...

    Suppose a U.S. firm buys $200,000 worth of stereo speaker wire from a Mexican manufacturer for delivery in 60 days with payment to be made in 90 days (30 days after the goods are received). The rising U.S. deficit has caused the dollar to depreciate against the peso recently. The current exchange rate is 5.50 pesos per U.S. dollar. The 90-day forward rate is 5.45 pesos/dollar. The firm goes into the forward market today and buys enough Mexican pesos at...

  • Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a...

    Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,400,000, payable as £2,200,000 on August 1 and €2,200,000 on November 1. Larkin derived its price quote of €4,400,000 on April 1 by dividing its normal U.S. dollar sales price of $6,160,000 by the then current spot rate of $1.4000/€. By the time the order was received and booked on May 1, the euro...

  • Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000, payable as €2,000,000 on August 1 and €2,000,000 on N

    Larkin Hydraulics. On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000, payable as €2,000,000 on August 1 and €2,000,000 on November 1. Larkin derived its price quote of €4,000,000 on April 1 by dividing its normal U.S. dollar sales price of $4.320,000 by the then current spot rate of $1.0800/€. By the time the order was received and booked on May 1, the euro...

  • Livingston Company is a wholly owned subsidiary of Rose Corporation. Livingston operates in a foreign country...

    Livingston Company is a wholly owned subsidiary of Rose Corporation. Livingston operates in a foreign country with financial statements recorded in goghs (GH), the company's functional currency. Financial statements for the year of 2017 are as follows: Income Statement For Year Ending December 31, 2017 Sales GH 270, eee Cost of goods sold (155,000) Gross profit 115,000 Less: Operating expenses (54,60e) Gain on sale of equipment 10,000 Net income GH 71,000 N Statement of Retained Earnings For Year Ending December...

  • ܝܢ Spartan Corporation manufactures quidgets at its plant in Sparta, Michigan. Spartan sells its quidgets to...

    ܝܢ Spartan Corporation manufactures quidgets at its plant in Sparta, Michigan. Spartan sells its quidgets to customers in the United States, Canada, England, and Australia. 10 points Spartan markets its products in Canada and England through branches in Toronto and London, respectively. Spartan reported total gross income on U.S. sales of $15,000,000 and total gross income on Canadian and U.K. sales of $5,000,000, split equally between the two countries. Spartan paid Canadian income taxes of $600,000 on its branch profits...

  • Spartan Corporation manufactures quidgets at its plant in Sparta, Michigan. Spartan sells its quidgets to customers...

    Spartan Corporation manufactures quidgets at its plant in Sparta, Michigan. Spartan sells its quidgets to customers in the United States, Canada, England, and Australia Spartan markets its products in Canada and England through branches in Toronto and London, respectively. Spartan reported total gross income on U.S. sales of $8,000,000 and total gross income on Canadian and U.K. sales of $4,000,000, split equally between the two countries. Spartan paid Canadian income taxes of $480,000 on its branch profits in Canada and...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT