On Friday, October 1st , Furnicom sells furniture products to Canadian companies, Carrier Ltd, at the price
Question:
On Friday, October 1st , Furnicom sells furniture products to Canadian companies, Carrier Ltd, at the price of CD$ 500,000 and will receive the revenue on December 31st . The exchange rate as of Oct 1st, is $0.8300/CD $ and the currency expert anticipates that Canadian dollar will be fluctuating within the range of $0.79 - $0.90 within the next three months. To offset any potential losses and minimize the foreign exchange rate risk regarding to the value of the U.S. dollar receivable, Furnicom is considering the use of derivatives instrument and money market hedge to hedge its exposure. Given the following information: 3 Month Forward and Future Quotation of CD$ BID-ASK Contract Size Maturity Date Future Rates $0.8322 - 325 100,000 unit December 31st Forward Rate $0.8422 - 445 - December 31st 3 Month Option Quotation: Contract Size 50,000 unit of CD$ Option #1 Option #2 Option #3 Option #4 Exercise Price $0.90 $0.89 0.87 0.92 Premium per unit 0.025 0.035 0.017 0.015 Types Call Put Put Call CD$ $ One Year Deposit Rate 4.00% 3.75% One Year Borrowing Rate 5.5% 4.75%
a) Currently, Furnicom have a wholly owned subsidiary in France. Use the following information to translate financial statement of the French subsidiary using the Monetary/ Non-Monetary and the current rate method. methods. Assumption: • The subsidiary is at the end of its first year of operation • The historical exchange rate is $1.60/ € and the most recent exchange rate is $2.00/ € Balance Sheet Local Currency Monetary/ Nonmonetary Current Rate Method Cash € 4,200 Inventory (Current Value = € 3,600) € 3,000 Net Fixed Assets € 6,000 Total Assets €,13,200 Current Liabilities € 2,400 Long-term Debt € 3,600 Common Stock € 5,400 Retained Earning € 1,800 CTA Total L& E € 13.200 Income Statement Sales Revenue € 20,000 COGS € 15,000 Depreciation € 2,000 NOI € 3,000 Tax (40%) € 1,200 Profit after tax € 1,800 Foreign Exchange gain (loss) Net Income € 1,800 Dividends 0 Addition to Retained Earning € 1,800
b) The following information is selected amount from the separate financial statement of Home Depot and the French subunit (unconsolidated). Given the following information, provide the consolidated financial statement for Home Depot (2 Points) • Furnicom owes French subsidiary $70 • During the year, French subsidiary transferred $250 dividend back to Home Depot. • French subsidiary owns the building that Furnicom rents for $200 • During the year, parent sold inventory to subsidiary for $2,200. It had cost the parent $1,500.Parent Subsidiary Consolidated Cash $180 80 Receivables 380 200 Account payable 245 110 Retained earning 790 680 Revenue 4980 3520 Rent income 0 200 Dividend Income 250 0 Expenses 4160 2960
c) Also, on Oct 1st Furnicom needs 20,000 AUD in 30 days (Nov 1st) to pay for the supplier in Australia. The company is trying to determine whether or not to hedge this position. Furnicom has developed the following probability distribution for future value of the AUD. Possible Value of AUD in 30 Days Probability $0.7600 15% $0.7640 25% $0.7700 35% $0.7720 25% Given that the 30 days forward contract on AUD is quoted as 0.7660-65. If the company implements a forward hedge, what is the probability that hedging will be more costly than unhedged. Determine the real cost of hedging
d) Furnicom also plan to expand to South Korea with the initial investment of 2 billion South Korean Won on a 3-years project. The project is expected to generate net cashflow of 3 billion won on the 1st year with the growth of 25% each year. The project has no savage value. The current value of the won is 1100 won per U.S. Dollar and remains the same in year 1 and 2. In year 3, the value of won is expected to be 1,200 won per U.S. Given the require rate of return is 13%, Should Furnicom invest in this project?
