Question

St. Paul Co. does business in the United States and New Zealand. In attempting to assess its economic exposure, it compiled the following information.

a.          St. Paul’s U.S. sales are somewhat affected by the value of the New Zealand dollar (NZ$), because it faces competition from New Zealand exporters. It forecasts the U.S. sales based on the following three exchange rate scenarios: 1) when exchange rate of NZ$=$0.40, revenue from US is $100 million, 2) exchange rate of NZ$=$0.50, revenue from US is $120 million, 3) exchange rate of NZ$=$0.55, revenue from US is $130 million

b.         Its New Zealand dollar revenues on sales to New Zealand invoiced in New Zealand dollars are expected to be NZ$100 million.

c.          Its anticipated cost of materials is estimated at $200 million from the purchase of U.S. materials and NZ$300 million from the purchase of New Zealand materials.

d.         Fixed operating expenses are estimated at $30 million.

e.          Variable operating expenses are estimated at 20 percent of total sales (after including New Zealand sales, translated to a dollar amount).

f.          Interest expense is estimated at $10 million on existing U.S. loans, and the company has NZ$100 existing New Zealand loans.

Part A: Forecast net cash flows for St. Paul Co. under each of the three exchange rate scenarios. Do your calculation on the paper.

Part B: Explain 3 methods how it can restructure its operations to reduce the sensitivity of its net cash flows to exchange rate movements.

Method 1:

Method 2:

Method 3:

Answer 1

Forecasted Net Cash Flows for St. Paul Company
(figures are in millions)
	NZ$ - $0.40	NZ$ - $0.50	NZ$ - $0.55
Sales
US (in millions)	100	120	130
NZ (NZ$ 100 millions)	40	50	55
Total	140	170	185
Cost of material:
US (in millions)	200	200	200
NZ (NZ$ 300 millions)	120	150	165
Total	320	350	365
Operating Expenses:
US - Fixed	30	30	30
US - variable @ 20%	28	34	37
Total	58	64	67
Interest Expense:
US (in millions)	10	10	10
NZ (NZ$ 100 millions)	40	50	55
Total	50	60	65
Net Cash Flows	(288)	(304)	(312)