Business

Impact of Krona Devaluation on Spectrum AB’s Financial Statement under FASB-52 FASB-52 = Statement of Financial Accounting Standards No. 52. First-year cash flow (SKr 4 = $1) $900,000 First-year cash flow (SKr 5 = $1) 720,000 Net loss from devaluation $180,000 Moreover, this loss will continue until relative prices adjust. Part of this loss, however, […]

Spectrum’s Economic Exposure On the basis of current information, it is impossible to determine the precise economic impact of the krona devaluation. Therefore, three different scenarios have been constructed, with varying degrees of plausibility, and Spectrum’s economic exposure has been calculated under each scenario. The three scenarios are 1. All variables remain the same. 2.

Summary of Projected Operations for Spectrum Manufacturing ab: Base Case Spectrum’s Accounting Exposure Exhibit 11.8 shows Spectrum’s balance sheet before and after an exchange rate change. To contrast the economic and accounting approaches to measuring exposure, assume that the Swedish krona devalues by 20%, from SKr 4 = $1 to SKr 5 = $1. The

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

Key Questions to Ask That Help Identify These three examples illustrate a progression of ideas. Aspen Skiing Company’s revenues were affected by exchange rate changes, but its costs were largely unaffected. By contrast, Pemex’s costs, but not its revenues, were affected by exchange rate changes. Toyota had both its costs and its revenues affected by

Toyota Motor Company Toyota is the largest Japanese auto company and the fourth largest non-U.S. industrial firm in the world. Over half of its sales are overseas, primarily in the United States. If the yen appreciates, Toyota has the choice of keeping its yen price constant or its dollar price constant. If Toyota holds its

Report in the Wall Street Journal, January 17, 1984, p. 1. Petróleos Mexicanos Petróleos Mexicanos, or Pemex, is the Mexican national oil company. It is the largest company in Mexico and ranks as one of the biggest non-U.S. industrial companies. Most of its sales are overseas. Suppose Pemex borrows U.S. dollars. If the peso devalues,

Identifying Economic Exposure At this point, it makes sense to illustrate some of the concepts just discussed by examining several firms to see in what ways they may be susceptible to exchange risk. The companies are Aspen Skiing Company, Petroleos Mexicanos, and Toyota Motor Company Aspen Skiing Company Aspen Skiing Company owns and operates ski

Questions 1. How much rand revenue per ounce was Harmony generating on September 11, 2001? Three years later? 2. The average exchange rate during 2001:Q2 was R8.04/$; in 2004:Q2, it was R6.60/$. Compare Harmony’s earnings per ounce in rand terms during 2001:Q2 with the same figure in 2004:Q2. 3. Given the exchange rates in question

how much would Harmony have to reduce its rand costs per ounce in 2004:Q2 in order to make the same rand profit per ounce it was earning in 2001:Q2? Questions 1. How much rand revenue per ounce was Harmony generating on September 11, 2001? Three years later? 2. The average exchange rate during 2001:Q2 was