What will happen to its translation exposure if it uses the funds to pay a dividend to its parent?
Zapata Auto Parts, the Mexican affiliate of American Diversified, Inc., had the following balance sheet on January 1:
Assets (Mex$ Millions)
Liabilities (Mex$ Millions)
Cash, marketable securities
Mex$1,000
Current liabilities
Mex$47,000
Accounts receivable
50,000
Long-term debt
12,000
Inventory
32,000
Equity
135,000
Net fixed assets
111,000
Total assets
Mex$194,000
Liabilities plus equity
Mex$194,000
The exchange rate on January 1 was Mex $8,000 = $1.
a. What is Zapata’s FASB-52 peso translation exposure on January 1?
b. Suppose the exchange rate on December 31 is Mex$12,000. What will be Zapata’s translation loss for the year?
c. Zapata can borrow an additional Mex$15,000 (in millions). What will happen to its translation exposure if it uses the funds to pay a dividend to its parent? If it uses the funds to increase its cash position?