Mark Taylor and Jack Rodwell, the owners of Tuxedo Air, have been in discussions with a light
Question:
Mark and Jack are confident the company can handle the extra volume withits existing facilities , but they are unsure about the potential financial risks of selling their planes inEurope . In their discussion withTracy, they found that the current exchange rate is $1.37/EUR. At the current exchange rate, the company would spend 80% of the sales on production costs . This number does not reflect the sales commmission paid to Tracy.
Mark and Jack have decided to ask Ed Cowan , the company's financial analyst , to prepare an analysis of the roposed international sales, specially, they ask Ed to answer the following questions
[Question a] What happens to Tuxedo Air’s profits if the dollar strengthens against Euro? What if the dollar weakens?
[Question b] Ignoring taxes, calculate Tuxedo Air’s projected gains or losses from this proposed arrangement at the current exchange rate of $1.35/EUR.
[Question c] What happens to the company’s profits if the exchange rate changes to $1.12/EUR, assuming that operating costs are fixed regardless of the FX rate movements?
[Question d] How would the company hedge its exchange rate risk using a forward contract with a forward rate of $1.25/EUR? What are the implications for this approach?
Federal Taxation 2016 Comprehensive
ISBN: 9780134104379
29th edition
Authors: Thomas R. Pope, Timothy J. Rupert, Kenneth E. Anderson