WK6: FIN POST

In a Microsoft Word document in APA (7.0) format, respond to the following questions from the chapters assigned. Responses to each question should range from 100 to 150 words. Include at least two external cited references (in addition to the textbook) for the overall assignment. If the question requires calculation, please show your work. Your assignment must include a title and reference page formatted in APA. Clearly provide the question number. There is no need to write the question.

The problems are to be completed in the Excel templates attached below.

Please save both files to include your name, such as “Name-FINC620-Week 5 Homework”

Chapter 9: Questions 1, 3, 4, 6, 8, 10

Problems – Complete in Excel Template Attached. Follow the directions in the problems. Do not refer to the book.

Chapter 10: Questions 2, 3, 4, 5, 6

Problems – Complete in Excel Template Attached. Follow the directions in the problems. Do not refer to the book.

Refer to the Writing Assignment Grading Guidelinesbelow for assignment requirements in content, organization, writing style, grammar, and APA 7.0 format.

Your paper will be automatically submitted to Turnitin in the assignment dropbox. Originality reports will be returned to the faculty and student. Your Similarity Index should not exceed 20% to prevent losing points. Refer to the following links for APA guidelines.

Problem 11.1 Ganado Europe (A)
Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in value from $1.2000/€ to $0.9000/€
rather than to $1.0000/€. Recalculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new exchange rate using the current rate method.
a. What is the amount of translation gain or loss?
b. Where should it appear in the financial statements?
Translation Using the Current Rate Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000
Liabilities & Net Worth
Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
Just before devaluation
Translated
Exchange Rate
Accounts
(US$/euro)
US dollars
1.2000
$
1,920,000
1.2000
3,840,000
1.2000
2,880,000
1.2000
5,760,000
$
14,400,000
1.2000
1.2000
1.2000
1.2760
1.2000
$
960,000
1,920,000
1,920,000
2,296,800
7,440,000
$
14,536,800
Just after devaluation
Exchange Rate
(US$/euro)
0.9000
0.9000
0.9000
0.9000
a. The translation gain (loss) is —————————————————————————————————————->
$
$
0.9000
0.9000
0.9000
1.2760
1.2000
Translated
Accounts
US dollars
1,440,000
2,880,000
2,160,000
4,320,000
10,800,000
$
720,000
1,440,000
1,440,000
2,296,800
7,440,000
$
13,336,800
Problem 11.2 Ganado Europe (B)
Using facts in the chapter for Ganado Europe, assume as in question Ganado Europe (A) that the exchange rate on January 2, 2006, in Exhibit 11.4 dropped in
value from $1.2000/€ to $0.9000/€ rather than to $1.0000/€. Recalculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new
exchange rate using the temporal rate method.
Translation Using the Temporal Method: euro depreciates from $1.2000/euro to $0.9000/euro.
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000
Liabilities & Net Worth
Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
Just before devaluation
Translated
Exchange Rate
Accounts
(US$/euro)
(US dollars)
1.2000
$
1,920,000
1.2000
3,840,000
1.2180
2,923,200
1.2760
6,124,800
$
14,808,000
1.2000
1.2000
1.2000
1.2760
1.2437
$
960,000
1,920,000
1,920,000
2,296,800
7,711,200
$
14,808,000
Just after devaluation
Exchange Rate
(US$/euro)
0.9000
0.9000
1.2180
1.2760
a. The translation gain (loss) is: —————————————————————————————————————>
$
$
0.9000
0.9000
0.9000
1.2760
1.2437
Translated
Accounts
(US dollars)
1,440,000
2,880,000
2,923,200
6,124,800
13,368,000
$
720,000
1,440,000
1,440,000
2,296,800
7,711,200
$
13,608,000
Problem 11.3 Ganado Europe ( C )
Using facts in the chapter for Ganado Europe, assume the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from $1.2000/€ to $1.500/€.
Calculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new exchange rate using the current rate method.
Translation Using the Current Rate Method: euro appreciates from $1.2000/euro to $1.5000/euro.
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000
Liabilities & Net Worth
Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
Just before revaluation
Translated
Exchange Rate
Accounts
(US$/euro)
US dollars
1.2000
$
1,920,000
1.2000
3,840,000
1.2000
2,880,000
1.2000
5,760,000
$
14,400,000
1.2000
1.2000
1.2000
1.2760
1.2000
$
960,000
1,920,000
1,920,000
2,296,800
7,440,000
$
14,536,800
Just after revaluation
Exchange Rate
(US$/euro)
1.5000
1.5000
1.5000
1.5000
$
$
1.5000
1.5000
1.5000
1.2760
1.2000
Translated
Accounts
US dollars
2,400,000
4,800,000
3,600,000
7,200,000
18,000,000
$
1,200,000
2,400,000
2,400,000
2,296,800
7,440,000
$
15,736,800
a. The translation gain (loss) is: —————————————————————————————————————>
b. The translation gain for the year is added to the balance in the Cumulative Translation adjustment account, which is carried as a separate balance sheet
account within the equity section of the consolidated balance sheet. The gain does not pass through the income statement under the current rate method in
which the currency of the foreign subsidiary is a local currency functional.
Problem 11.4 Ganado Europe (D)
Using facts in the chapter for Ganado Europe, assume as in Ganado Europe (C) that the exchange rate on January 2, 2006, in Exhibit 11.4 appreciated from
$1.2000/€ to $1.5000/€. Calculate Ganado Europe’s translated balance sheet for January 2, 2006 with the new exchange rate using the temporal method.
Translation Using the Temporal Method: euro appreciates from $1.2000/euro to $1.5000/euro.
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Euros
Statement
1,600,000
3,200,000
2,400,000
4,800,000
12,000,000
Liabilities & Net Worth
Accounts payable
Short-term bank debt
Long-term debt
Common stock
Retained earnings
CTA account (loss)
Total
800,000
1,600,000
1,600,000
1,800,000
6,200,000
12,000,000
Just before revaluation
Translated
Exchange Rate
Accounts
(US$/euro)
(US dollars)
1.2000
$
1,920,000
1.2000
3,840,000
1.2180
2,923,200
1.2760
6,124,800
$
14,808,000
1.2000
1.2000
1.2000
1.2760
1.2437
$
960,000
1,920,000
1,920,000
2,296,800
7,711,200
$
14,808,000
Just after revaluation
Exchange Rate
(US$/euro)
1.5000
1.5000
1.2180
1.2760
$
$
1.5000
1.5000
1.5000
1.2760
1.2437
Translated
Accounts
(US dollars)
2,400,000
4,800,000
2,923,200
6,124,800
16,248,000
$
1,200,000
2,400,000
2,400,000
2,296,800
7,711,200
$
16,008,000
a. The translation gain (loss) is:
b. Under the Temporal Method, the translation gain of $240,000 would be closed into retained earnings through the income statement,
rather than as a separate line item. It is shown as a separate line item above for pedagogical purposes only. Actual year-end retained
earnings would be $7,711,200 + $240,000 = $7,951,200.
c. The translation gain (loss) differs from the Current Rate Method because “exposed assets” under the Current Rate Method are larger than
under the temporal method by the amount of inventory and net plant & equipment.
Problem 11.8 Bangkok Instruments, Ltd (A)
Bangkok Instruments, Ltd., is the Thai affiliate of a U.S. seismic instrument manufacturer. Bangkok Instruments manufactures the instruments primarily for the oil
and gas industry globally, though with recent commodity price increases of all kinds — including copper — its business has begun to grow rapidly. Sales are
primarily to multinational companies based in the United States and Europe. bankok Instruments’ balance sheet in thousands of Thai bahts (B) as of March 31st is
as follows.
Using the data presented, assume that the Thai baht dropped in value from B30/$ to B40/$ between March 31st and April 1st. Assuming no change in balance
sheet accounts between these two days, calculate the gain or loss from translation by both the current rate method and the temporal method. Explain the translation
gain or loss in terms of changes in the value of exposed accounts.
TRANSLATION BY THE CURRENT RATE METHOD
Balance Sheet (thousands)
Before Devaluation
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Thai baht
Statement
฿24,000
36,000
48,000
60,000
฿168,000
Exchange Rate
(Baht/US$)
30
30
30
30
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total
฿18,000
60,000
18,000
72,000
0
฿168,000
30
30
20
34
After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
2,000
5,600
$
$
$
Exchange Rate
(Baht/US$)
40
40
40
40
$
$
600
2,000
900
2,100
5,600
$
Translated
Accounts
US dollars
600
900
1,200
1,500
4,200
40
40
20
34
$
450
1,500
900
2,100
$
4,950
Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
This cumulative translation account (CTA) loss of $750,000 would be entered into the company’s consolidated balance sheet under equity.
TRANSLATION BY THE TEMPORAL METHOD
Balance Sheet (thousands)
Before Devaluation
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Thai baht
Statement
฿24,000
36,000
48,000
60,000
฿168,000
Exchange Rate
(Baht/US$)
30
30
30
20
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total
฿18,000
60,000
18,000
72,000
0
฿168,000
30
30
20
$
$
After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
3,000
6,600
$
Exchange Rate
(Baht/US$)
40
40
600
2,000
900
40
40
20
$
Translated
Accounts
US dollars
600
900
#DIV/0!
#DIV/0!
#DIV/0!
$
#DIV/0!
450
1,500
900
#DIV/0!
#DIV/0!
#DIV/0!
Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.
The translation gain of $150,000 would be passed-through to the consolidated income statement.
EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY
The Temporal Method results in a translation gain, as opposed to the CTA loss found under the Current Rate Method, because of the different
exchange rates used against Net plant & equipment and the inventory line items. This gain would be impossible under the Current Rate
Method because ALL assets are exposed under that method, whereas the Temporal Method carries Net plant & equipment and inventory
at relevant historical exchange rates.
Problem 11.9 Bangkok Instruments, Ltd (B)
Using the original data provided for Bangkok Instruments, assume that the Thai baht appreciated in value from B30/$ to B25/$ between March 31 and April 1.
Assuming no change in balance sheet accounts between those two days, calculate the gain or loss from translation by both the current rate method and the temporal
method. Explain the translation gain or loss in terms of changes in the value of exposed accounts.
TRANSLATION BY THE CURRENT RATE METHOD
Balance Sheet (thousands)
Before Devaluation
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Thai baht
Statement
฿24,000
36,000
48,000
60,000
฿168,000
Exchange Rate
(Baht/US$)
30
30
30
30
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total
฿18,000
60,000
18,000
72,000
0
฿168,000
30
30
20
34
After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
2,000
5,600
$
$
$
Exchange Rate
(Baht/US$)
25
25
25
25
$
$
600
2,000
900
2,100
5,600
$
Translated
Accounts
US dollars
960
1,440
1,920
2,400
6,720
25
25
20
34
$
720
2,400
900
2,100
$
6,120
Note: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
TRANSLATION BY THE TEMPORAL METHOD
Balance Sheet (thousands)
Before Devaluation
Assets
Cash
Accounts receivable
Inventory
Net plant & equipment
Total
Thai baht
Statement
฿24,000
36,000
48,000
60,000
฿168,000
Exchange Rate
(Baht/US$)
30
30
30
Liabilities & Net Worth
Accounts payable
Bank loans
Common stock
Retained earnings
CTA account (loss)
Total
฿18,000
60,000
18,000
72,000
0
฿168,000
30
30
20
$
After Devaluation
Translated
Accounts
US dollars
800
1,200
1,600
#DIV/0!
#DIV/0!
$
Exchange Rate
(Baht/US$)
25
25
600
2,000
900
25
25
20
$
$
#DIV/0!
#DIV/0!
Note a: Dollar retained earnings before devaluation are the cumulative sum of additions to retained earnings of all prior years, translated at exchange
rates in effect in each of those years.
Note b: Retained earnings after devaluation are translated at the same effective rate (see Note a) as before devaluation.
The translation loss of $120,000 would be passed-through to the consolidated income statement.
EXPLANATION OF DIFFERENT OUTCOME BY TRANSLATION METHODOLOGY
Translated
Accounts
US dollars
960
1,440
#DIV/0!
#DIV/0!
#DIV/0!
720
2,400
900
#DIV/0!
#DIV/0!
#DIV/0!
Problem 12.1 Mauna Loa Macadamia
Mauna Loa, a macadamia nut subsidiary of Hershey’s with planations on the slopes of its namesake volcano in Hilo, Hawaii,
exports Macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen
to Japanese customers of ¥1,200,000,000. At the present exchange rate of ¥125/$ this is equivalent to $9,600,000. Sales are
relatively equally distributed during the year. They show up as a ¥250,00,000 account receivable on Mauna Loa’s balance sheet.
Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically ¥100,000,000.
Mauna Loa would like to hedge its yen receipts, but it has too many customers and transactions to make it practical to sell each
receivable forward. It does not want to use options because they are considered to be too expensive for this particular purpose.
Therefore, they have decided to use a “matching” hedge by borrowing yen.
a. How much should Mauna Loa borrow in yen?
b. What should be the terms of payment on the yen loan?
a. How much should Mauna Loa borrow in yen?
Mauna Loa receives cash collections of one hundred million yen per month. This is the source of repayment of any
balance sheet hedge. If Mauna Loa wants to be covered for one year at a time, it would need to borrow one year’s
cash flow plus interest, and convert the borrowed yen to US dollar at once. A sample calculation would be:
One month’s cash flow
Months per year
One year’s cash flow
Plus interest
Principal and interest
Spot exchange rate
US dollars
b. What should be the terms of payment on the loan?
Sample Values
100,000,000
12
1,200,000,000
4.000%
1,248,000,000
125.00
Units
Yen
Yen
per annum
Yen
Yen/US$
US$
Problem 12.2 Acuña Leather Goods
DeMagistris Fashion Company, based in New York City, imports leather coats from Acuña Leather Goods, a reliable and
longtime supplier, based in Buenos Aires, Argentina. Payment is in Argentine pesos. When the peso lost its parity with the
U.S. dollar in January 2002 it collapsed in value to Ps 4.0/$ by October 2002. The outlook was for a further decline in the
peso’s value. Since both DeMagistris and Acuña wanted to continue their longtime relationship they agreed on a risksharing arrangement. As long as the spot rate on the date of an invoice is between Ps3.5/$ and Ps4.5/$ DeMagistris will
pay based on the spot rate. If the exchange rate falls outside this range they will share the difference equally with Acuña
Leather Goods. The risk-sharing agreement will last for six months, at which time the exchange rate limits will be
reevaluated. DeMagistris contracts to import leather coats from Acuña for Ps8,000,000 or $2,000,000 at the current spot
rate of Ps4.0/$ during the next six months.
a. If the exchange rate changes immediately to Ps6.00/$, what will be the dollar cost of 6 months of imports to
b. At Ps6.00/$, what will be the peso export sales in Acuña Leather Goods to DeMagistris Fashion Company?
a. If the exchange rate changes immediately to Ps6.00/$, what will be the dollar cost of 6 months of imports to
Pucini?
Bottom
3.50
The allowable range of exchange rates is (Ps/$)
Outside of this range the trading partners will share the extra risk equally.
New exchange rate (Ps/$)
Allowable exchange rate (Ps/$)
Difference to be shared (Ps/$)
DeMagistris’ share
Acuña’s share
6.00
4.50
1.50
0.75
Therefore, DeMagistris will use the following effective exchange rate after risk-sharing:
Top of range
DeMagistris’ share
Effective total of risk-sharing
4.50
–
Assuming that 6 months of imports will still be (Ps)
Effective exchange rate for DeMagistris (Ps/$)
DeMagistris’ cost in US dollars
8,000,000
#DIV/0!
b. At Ps6.00/$, what will be the peso export sales in Acuña to DeMagistris?
Top
4.50
Problem 12.4 Manitowoc Crane (B)
Assume the same facts as in Manitowoc Crane (A). Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 12% per annum for
eight years. Dollar costs will not change. At the end of ten years, Manitowoc’s patent expires and it will no longer export to China. After the yuan is devalued to Yuan9.20/$, no further
devaluations are expected. If Manitowoc Crane raises the yuan price so as to maintain its dollar price, volume will increase at only 1% per annum for eight years, starting from the lower
initial base of 9,000 units. Again dollar costs will not change and at the end of eight years Manitowoc Crane will stop exporting to China. Manitowoc’s weighted average cost of capital is
10%. Given these considerations, what should be Manitowoc’s pricing policy?
Assumptions
Sales volume per year
US dollar price per unit
Direct costs as % of US$ price
Direct costs per unit
Spot exchange rate, yuan/$
Expected spot rate, yuan/$
Values
10,000
$24,000
75%
$18,000
8.2000
9.2000
Assumptions
Volume change
(if price increased)
Volume growth
(same Rmb price)
WACC
Values
1%
12%
10%
Alternative 1: Keep Same Chinese Sales Price
Year
1
2
3
4
5
6
7
8
Cum PV of Gross Margin
Volume
10,000
11,200
12,544
14,049
15,735
17,623
19,738
22,107
Revenue
$213,913,043
$239,582,609
$268,332,522
$300,532,424
$336,596,315
$376,987,873
$422,226,418
$472,893,588
Direct Costs
$180,000,000
$201,600,000
$225,792,000
$252,887,040
$283,233,485
$317,221,503
$355,288,083
$397,922,653
Gross
Margin
$33,913,043
$37,982,609
$42,540,522
$47,645,384
$53,362,830
$59,766,370
$66,938,335
$74,970,935
Present Value
Factor
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
Present Value
of Margin
$30,830,040
$31,390,586
$31,961,324
$32,542,439
$33,134,119
$33,736,558
$34,349,950
$34,974,494
Volume
9,000
9,090
9,181
9,273
9,365
9,459
9,554
9,649
Revenue
$216,000,000
$218,160,000
$220,341,600
$222,545,016
$224,770,466
$227,018,171
$229,288,353
$231,581,236
Direct Costs
$162,000,000
$163,620,000
$165,256,200
$166,908,762
$168,577,850
$170,263,628
$171,966,264
$173,685,927
Gross
Margin
$54,000,000
$54,540,000
$55,085,400
$55,636,254
$56,192,617
$56,754,543
$57,322,088
$57,895,309
Present Value
Factor
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
Present Value
of Margin
$49,090,909
$45,074,380
$41,386,476
$38,000,310
$34,891,194
$32,036,460
$29,415,295
$27,008,589
Alternative 2: Raise Chinese Sales Price
Year
1
2
3
4
5
6
7
8
Cum PV of Gross Margin
Problem 12.10 Hurte-Paroxysm Products, Inc. (B)
Assume the same facts as in Hurte-Paroxysm Products, Inc. (A). HP Products also believes that if it maintains the same price in Brazilian reais as a permanent policy,
volume will increase at 10% per annum for six years. Dollar costs will not change. At the end of six years HP Products’ patent expires and it will no longer export to
Brazil. After the reais is devalued to R$4.00/US$ no further devaluation is expected. If HP Products raises the price in reais so as to maintain its dollar price, volume will
increase at only 4% per annum for six years, starting from the lower initial base of 40,000 units. Again dollar costs will not change, and at the end of six years HP Products
will stop exporting to Brazil. HP Products’ weighted average cost of capital is 12%. Given these considerations, what do you recommend for HP Products’ pricing policy?
Justify your recommendation.
Assumptions
Initial sales volume
Sales volume growth
Sales price, US$
Direct cost per unit
End
of year
1
2
3
4
5
6
Value
50,000
10%
$170.00
$120.00
Alternative #1: Maintain current Brazilian sales price and volume grows 10% per annum
Contribution
12%
Sales volume
US$ Revenue
Direct Costs
Margin
PV Factor
50,000
$8,500,000
$6,000,000
$2,500,000
0.8929
55,000
$9,350,000
$6,600,000
$2,750,000
0.7972
60,500
$10,285,000
$7,260,000
$3,025,000
0.7118
66,550
$11,313,500
$7,986,000
$3,327,500
0.6355
73,205
$12,444,850
$8,784,600
$3,660,250
0.5674
80,526
$13,689,335
$9,663,060
$4,026,275
0.5066
Present Value
$2,232,143
$2,192,283
$2,153,135
$2,114,686
$2,076,924
$2,039,836
Present value of contribution margins
Assumptions
Initial sales volume
Sales volume growth
Sales price, US$
Direct cost per unit
End
of year
1
2
3
4
5
6
Value
40,000
4%
$200.00
$120.00
Alternative #2: Raise Brazilian sales price to R$400 and volume grows only 4% per annum from a lower volume base
Contribution
12%
Sales volume
US$ Revenue
Direct Costs
Margin
PV Factor
40,000
$8,000,000
$4,800,000
$3,200,000
0.8929
41,600
$8,320,000
$4,992,000
$3,328,000
0.7972
43,264
$8,652,800
$5,191,680
$3,461,120
0.7118
44,995
$8,998,912
$5,399,347
$3,599,565
0.6355
46,794
$9,358,868
$5,615,321
$3,743,547
0.5674
48,666
$9,733,223
$5,839,934
$3,893,289
0.5066
Present value of contribution margins
Present Value
$2,857,143
$2,653,061
$2,463,557
$2,287,589
$2,124,189
$1,972,462