Sterling & Company is a silverware manufacturer based in the town of Sevenoaks in the United...

 

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Sterling & Company is a silverware manufacturer based in the town of Sevenoaks in the United Kingdom. Although Sterling exports to companies around the world, its biggest customers are in the United States. Accounts that are denominated in dollars are indicated in parentheses "($)" in the following balance sheet. The exchange rate is currently $1.50/£. Value in local currency in £s $45,000 £30,000 £10,000 Value in Value Valuc Cash ($) Cash (£) Receivables (£) Inventory (£) Current assets local currency in £s £20,000 £20,000 £30,000 £10.000 £80,000 Payables ($) Payables (£) $30,000 Current liabilities Long-term debt ($) $90,000 Long-term debt (£) Net worth Total liabilities £40,000 £60,000 £20,000 £40,000 £160,000 Real assets Total assets £80,000 £160.000 a. What is the value of monetary assets and of monetary liabilitiesthat are exposed to the dollar? What is the value of net monetary assets with a dollar exposure?" b. If the dollar appreciates by 10 percent, by how much will monetary assets change in value? By how much will monetary liabilities change in value? What are the r-squares of these relations? c. Suppose inventory is not exposed to the dollar and that the exposure of real assets is B = Pr,(o/0.), where Prs = 0.10, a, = 0.20, and o, = 0.10. If the dollar rises in value by 10 percent, by how much are Sterling & Company's real assets likely to change in value? What is the r- square of this relation? Do you have much confidence in this estimate of the change in value? Why or why not. d. Given your results in parts b and c, by how much is Sterling & Company's equity likely to change in value with a 10 percent appreciation of the dollar? e. Sterling has a relatively large amount of dollar debt. Is this reasonable given their operating exposure from part c? Relate your answer to the r-square of the exposure coefficient in part c. f. Sterling is considering opening a manufacturing plant in the U.S. to hedge its dollar exposure. Discuss the advantages and disadvantages of this operating hedge of Sterling's dollar exposure. Sterling & Company is a silverware manufacturer based in the town of Sevenoaks in the United Kingdom. Although Sterling exports to companies around the world, its biggest customers are in the United States. Accounts that are denominated in dollars are indicated in parentheses "($)" in the following balance sheet. The exchange rate is currently $1.50/£. Value in local currency in £s $45,000 £30,000 £10,000 Value in Value Valuc Cash ($) Cash (£) Receivables (£) Inventory (£) Current assets local currency in £s £20,000 £20,000 £30,000 £10.000 £80,000 Payables ($) Payables (£) $30,000 Current liabilities Long-term debt ($) $90,000 Long-term debt (£) Net worth Total liabilities £40,000 £60,000 £20,000 £40,000 £160,000 Real assets Total assets £80,000 £160.000 a. What is the value of monetary assets and of monetary liabilitiesthat are exposed to the dollar? What is the value of net monetary assets with a dollar exposure?" b. If the dollar appreciates by 10 percent, by how much will monetary assets change in value? By how much will monetary liabilities change in value? What are the r-squares of these relations? c. Suppose inventory is not exposed to the dollar and that the exposure of real assets is B = Pr,(o/0.), where Prs = 0.10, a, = 0.20, and o, = 0.10. If the dollar rises in value by 10 percent, by how much are Sterling & Company's real assets likely to change in value? What is the r- square of this relation? Do you have much confidence in this estimate of the change in value? Why or why not. d. Given your results in parts b and c, by how much is Sterling & Company's equity likely to change in value with a 10 percent appreciation of the dollar? e. Sterling has a relatively large amount of dollar debt. Is this reasonable given their operating exposure from part c? Relate your answer to the r-square of the exposure coefficient in part c. f. Sterling is considering opening a manufacturing plant in the U.S. to hedge its dollar exposure. Discuss the advantages and disadvantages of this operating hedge of Sterling's dollar exposure.

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