Imagine that you are a financial manager of a multinational corporation, like Starbucks Coffee, in charge of determining the impact of exchange rate changes on the firm Changes in currency exchange affect both the balance sheet and the income statement The balance sheet impact occurs when the value...

a and b A devaluing dollar means that international assets will appear to be worth more in terms of the dollar The shaded area shows a 10 percent incr ...

Imagine that you are a financial manager of a multinational corporation, like Starbucks Coffee, in charge of

Question:

Imagine that you are a financial manager of a multinational corporation, like Starbucks Coffee, in charge of determining the impact of changes on the firm. Changes in currency exchange affect both the and the income statement. The impact occurs when the value of international assets are translated to U.S. dollars. The values of those assets change as the changes. The value of costs, revenue, and profit also are impacted on the income statement because of risk. Consider that your firm has the following investments in coffee bean production and processing:
COUNTRY VALUE (MILLIONS)
Columbia ............ $75
Kenya ............. 100
Papua New Guinea ....... 80
The expense of all the labor, production, and beans will require the following exchanges to the foreign currency:
COUNTRY CASH FLOW (MILLIONS)
Columbia ........... 78,180 pesos
Kenya ............ 3,200 shilling
Papua New Guinea ........ 100 kina
Your firm has also invested in store facilities to sell the coffee products. The countries and the value of the investments are:
COUNTRY VALUE (MILLIONS)
Canada ........... $200
Japan ............. 100
United Kingdom ....... 150
The net profit from these countries next year is projected to be:
COUNTRY CASH FLOW (MILLONS)
Canada ........... CA$80
Japan ............. ¥7,200
United Kingdom ....... £30
Current spot exchange rates are:
$1 = 2,204.5 Columbian pesos
$1 = 69.480 Kenyan shilling
$1 = 3.0189 Papua New Guinea kina
$1 = 1.1690 Canadian dollar
$1 =117.04 Japanese yen
$1 = 0.5182 British pound
Your task is to determine the following:
a. What is the impact on the value of the international assets and the cash flow if the dollar were to devalue by ten percent against each currency (one at a time)?
b. What is the overall impact of a 10 percent dollar devaluation against every currency?
c. What the impact on the value of the international assets and the cash flow if the dollar were to strengthen by ten percent against each currency (one at a time)?
d. What is the overall impact of a 10 percent strengthening against every currency? What can be done to hedge this risk?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...