Problem on Operating Exposure

Consider a Danish subsidiary (Bansk AS) of a US firm, Graphic Systems. Assume that Bansk AS has the following projected income statement below at the current exchange rate of $0.20/Danisk kroner (DK).

Table: Bansk Cashflow Statement Details in Danisk Kroner (DK)

Total sales (2 m units @DK20/unit)

Direct Costs (2 m units @ DK12/unit)

Fixed Overhead expenses : DK5.1 million

Depreciation : DK0.9 million

Taxes @ 50%

First find CFs in DK as well as US$.

Now Assume DK devalues to $0.15/DK.

Assume of the 2 million units, 1 million are sold at home and 1 million are exported.

Consider the scenario: Compute the cash-flows in dollars under each scenario?

Case (a): Sticky prices at home (same at DK20/unit but increase in export prices by 33% to DK26.67/unit.