Calculating Economic Exposure
We will now work through a hypothetical, though comprehensive, example illustrating all the various aspects of exposure that have been discussed so far. This example emphasizes the quantitative, rather than qualitative, determination of economic exposure. It shows how critical the underlying assumptions are.
Spectrum Manufacturing AB is the wholly owned Swedish affiliate of a U.S. multinational industrial plastics firm. It manufactures patented sheet plastic in Sweden, with 60% of its output currently being sold in Sweden and the remaining 40% exported to other European countries. Spectrum uses only Swedish labor in its manufacturing process, but it uses both local and foreign sources of raw material. The effective Swedish tax rate on corporate profits is 40%, and the annual depreciation charge on plant and equipment, in Swedish kronor (SKr), is SKr 900,000. In addition, Spectrum AB has outstanding SKr 3 million in debt, with interest payable at 10% annually.
Exhibit 11.7 presents Spectrum’s projected sales, costs, after-tax income, and cash flow for the coming year, based on the current exchange rate of SKr 4 = $1. All sales are invoiced in kronor (singular, krona).