Question

In: Finance

Using the cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and...

Using the cost and revenue information shown for DeKalb, Inc., determine how the costs, revenue, and cash flow items would be affected by three possible exchange rate scenarios for the New Zealand dollar (NZ$): (1)
NZ
$
=
$
.50
NZ
$
=
$
.50
, (2)
NZ
$
=
$
.55
NZ
$
=
$
.55
, and (3)
NZ
$
=
$
.60
NZ
$
=
$
.60
. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that NZ$ earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects.

REVENUE AND COST ESTIMATES: DEKALB, INC. (IN MILLIONS OF U.S. DOLLARS AND NEW ZEALAND DOLLARS)
U.S. BUSINESS NEW ZEALAND BUSINESS
Sales $800 NZ$800
Cost of materials 500 100
Operating Expenses 300 0
Interest expense 100 0
Cash flow −100 NZ$700

Solutions

Expert Solution

The company is more dependant on Newzealand Business for the overall cashflow since US Business as such incurs negative cash flow of $100 and only combining with Newzealand business, gets a positive cash flow.

Also, since the Newzealand earnings are remitted back to US parent, if the NZD appreciates and USD weakens, the cash-flows becomes more favourable since the company gets more of USD for the equivalent NZD.

Workings:


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