Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals). Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios. The following table shows Salem’s cash flows under each of these exchange rates. Use the table to answer the question that follows. Exchange Rate Scenario Exchange Rate Scenario Exchange Rate Scenario C$1=$0.70 C$1=$0.75 C$1=$0.80 (Millions) (Millions) (Millions) Sales (1) U.S. Sales $315 $315 $315 (2) Canadian Sales $3.50 $4.00 $4.00 (3) Total Sales in U.S. $ $318.50 $318.75 $319.00 Cost of Materials and Operating Expenses (4) U.S. Cost of Materials $45 $45 $45 (5) Canadian Cost of Materials $105.00 $112.50 $120.00 (6) Total Cost of Materials in U.S. $ $150.00 $157.50 $165.00 (7) Operating Expenses $55 $55 $55 Interest Expense (8) U.S. Interest Expense $5 $5 $5 (9)Canadian Interest Expense $7.00 $7.50 $8.00 (10) Total Interest Expenses in U.S. $12.00 $12.50 $13.00 Cash Flows in U.S.$ before Taxes $101.50 $93.75 $86.00 For higher Canadian dollar exchange rates, Salem’s cash flows in U.S. dollars INCREASE OR DECREASE .

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter4: Exchange Rate Determination

Section: Chapter Questions

Problem 24QA

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Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economic exposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the only foreign currency in which it deals).

Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios.

The following table shows Salem’s cash flows under each of these exchange rates.

Use the table to answer the question that follows.

	Exchange Rate Scenario		Exchange Rate Scenario	Exchange Rate Scenario
C$1=$0.70	C$1=$0.75	C$1=$0.80
(Millions)	(Millions)	(Millions)
Sales
(1) U.S. Sales	$315		$315	$315
(2) Canadian Sales	$3.50		$4.00	$4.00
(3) Total Sales in U.S. $	$318.50		$318.75	$319.00
Cost of Materials and Operating Expenses
(4) U.S. Cost of Materials	$45		$45	$45
(5) Canadian Cost of Materials	$105.00		$112.50	$120.00
(6) Total Cost of Materials in U.S. $	$150.00		$157.50	$165.00
(7) Operating Expenses	$55		$55	$55
Interest Expense
(8) U.S. Interest Expense	$5		$5	$5
(9)Canadian Interest Expense	$7.00		$7.50	$8.00
(10) Total Interest Expenses in U.S.	$12.00		$12.50	$13.00

Cash Flows in U.S.$ before Taxes	$101.50		$93.75	$86.00

For higher Canadian dollar exchange rates, Salem’s cash flows in U.S. dollars INCREASE OR DECREASE .

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