Question

1. Using the following cost and revenue information for Prestige Worldwide (PWW), determine how the costs, revenue, and cash flow items would be affected by the possible exchange rate scenarios for the pound: (1) £ = $1.20, (2) £= $1.25, and (3) £= $1.30. Would Prestige Worldwide be favorably or unfavorably affected by a weakening pound? Why? Explain. Assume that U.S. sales will be unaffected by the exchange rate. Also, assume that £ earnings will be remitted to the U.S. parent at the end of the period. Lastly, ignore possible tax effects.

Please simply complete the table below (populate the table with the USD cash flows for each account under each scenario). You may instead choose to insert a copy of an Excel generated table below – however, if you decide to use Excel, I require you to turn in an electronic copy of your spreadsheet (in addition to pasting the table into the quiz). Failure to do both (paste table into quiz and turn in spreadsheet) will constitute an incomplete answer. (30 points).

	USD ($)	Pounds (£)
Sales	400	325
Cost of Materials	240	150
Operating Expenses	100	50
Interest Expense	200	---
Cash Flow	???	???

Direct Exchange Rate	$1.20	$1.25	$1.30
Sales
US Sales
UK Sales (in USD)
Total Sales
Cost of Materials
US Cost of Materials
UK Cost of Materials (in USD)
Total Cost of Materials
Operating Expenses
US Operating Expense
UK Operating Expense (in USD)
Total Operating Expense
Interest Expenses
US Interest Expense
UK Interest Expense (in USD)	-----	-----	-----
Total Interest Expense
Total Cash Flow (in USD)

Answer 1

Find below the cash-flow:

Would Prestige Worldwide will be unfavorably affected by a weakening pound. A weakeing pound implies depreciation in pound in relative to dollar. For Would Prestige Worldwide , since the earnings in GBP are remitted to US parent, pound weakening will result in lesser equivalent USD remittances. Thus, as can be seen, company has net earnings of 125 pounds (325-150-50). When the exchange rate is USD 1.3/GBP, the corresponding USD remittance was $162.5 (125*1.3) . When GBP weakens and exchange rate is USD 1.25/GBP, the corresponding USD remittance reduces to $156.25 (125*1.25) and the corresponding USD remittance reduces further to $150.0 (125*1.2) when the GBP further weakens and exchange rate is USD 1.2/GBP.

Workings: