Chapter 19

Multinational Financial Management

Comprehensive/Spreadsheet Problem

19-18 a. Input Data

Cost of component X (in Sfrancs) SFr. 165
Cost of component Y (in euros) 20 €
Cost of component Z (in pounds) £105
Sale price of the SY-20 (in yen) ¥42,000

We will convert the cost of each component to dollars, and find the total cost of the SY-20. We will do the same
to find the dollar sale price.

Component X
Cost of X in $ = Cost in Sfrancs × Direct spot exchange rate
Cost of X in $ = 165.00 × 1.2983
Cost of X in $ = $214.22

Component Y
Cost of Y in $ = Cost in euros × Direct spot exchange rate
Cost of Y in $ = 20.00 × 1.4323
Cost of Y in $ = $28.65

Component Z
Cost of Z in $ = Cost in pounds × Direct spot exchange rate
Cost of Z in $ = 105.00 × 1.6426
Cost of Z in $ = $172.47

TOTAL COST OF THE SY-20 (in dollars) = $415.34

Revenue from sale of the SY-20

Sale price (in yen) = Price in yen × Direct spot exchange rate
Sale price (in yen) = 42,000 × 0.01297774
Sale price (in yen) = $545.07

SY-20 SALES PRICE (in dollars) = $545.07

b. The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost.

Dollar profit = Sales price – Total cost

Dollar profit = $545.07 – $415.34
Dollar profit = $129.73

The percentage profit is determined as the dollar profit divided by the total cost.

% profit = $ profit / Total cost

% profit = $129.73 / $415.34
% profit = 31.23%

Chapter 19: Multinational Financial Management Integrated Case 1

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 c. If the dollar were to weaken by 10% against all currencies, that could be expressed by multiplying the direct
quotations of foreign exchange rates by (1 − % change), to reflect a 10% decrease in purchasing strength.
Since there is a weakening of the dollar, the % is negative.

Change in dollar strength against all currencies -10%

We will reproduce the table from the top of the spreadsheet, but we will add a column for the new exchange rates.

Direct Indirect New Direct

Quotations Quotations Quotations
British pound 1.6426 0.6088 1.8069
Euro 1.4323 0.6982 1.5755
Japanese yen 0.01297774 77.06 0.01427551
Swiss franc 1.2983 0.7702 1.4281

Now, we will recompute the component costs and sales price of the SY-20.

Component X
Cost of X in $ = Cost in Sfrancs × Direct spot exchange rate
Cost of X in $ = 165.00 × 1.4281
New cost of X in $ = $235.64

Component Y
Cost of Y in $ = Cost in euros × Direct spot exchange rate
Cost of Y in $ = 20.00 × 1.5755
New cost of Y in $ = $31.51

Component Z
Cost of Z in $ = Cost in pounds x Direct spot exchange rate
Cost of Z in $ = 105.00 × 1.8069
New cost of Z in $ = $189.72

TOTAL COST OF THE SY-20 (in dollars) = $456.87

Revenue from sale of the SY-20

Sale price (in yen) = Price in yen × Direct spot exchange rate
Sale price (in yen) = 42,000 × 0.01427551
Sale price (in yen) = $599.57

SY-20 SALES PRICE (in dollars) = $599.57

The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost.

Dollar profit = Sales price – Total cost

Dollar profit = $599.57 – $456.87
Dollar profit = $142.70

The percentage profit is determined as the dollar profit divided by the total cost.

% profit = $ profit / Total cost

% profit = $142.70 / $456.87
% profit = 31.23%

From this exercise, we see that since all costs and revenues are generated overseas, an across the board
weakening of the dollar does not result in any decreased profitability for Yohe's SY-20. The lack of decreased
profitability may seem surprising because of the significant increase in cost of the SY-20, but remember that
the same increase was observed in the sales price of the SY-20.

2 Integrated Case Chapter 19: Multinational Financial Management

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 The percentage profit is determined as the dollar profit divided by the total cost.

% profit = $ profit / Total cost

% profit = $142.70 / $456.87
% profit = 31.23%

From this exercise, we see that since all costs and revenues are generated overseas, an across the board
weakening of the dollar does not result in any decreased profitability for Yohe's SY-20. The lack of decreased
profitability may seem surprising because of the significant increase in cost of the SY-20, but remember that
the same increase was observed in the sales price of the SY-20.

d. Once again, we must reconstruct the currency table from the top of the worksheet. This time, however, we will
only be changing the exchange rate for the yen. Again, we will be multiplying the old rate by (1 − % change).
Since there is a weakening of the dollar, that % is a negative number.

Change in dollar strength against Japanese yen -10%

Direct Indirect New Direct

Quotations Quotations Quotations
British pound 1.6426 0.6088 1.6426
Euro 1.4323 0.6982 1.4323
Japanese yen 0.01297774 77.06 0.01427551
Swiss franc 1.2983 0.7702 1.2983

Now, we will recompute the component costs and sales price of the SY-20.

Component X
Cost of X in $ = Cost in Sfrancs × Direct spot exchange rate
Cost of X in $ = 165.00 × 1.2983
New cost of X in $ = $214.22

Component Y
Cost of Y in $ = Cost in euros × Direct spot exchange rate
Cost of Y in $ = 20.00 × 1.4323
New cost of Y in $ = $28.65

Component Z
Cost of Z in $ = Cost in pounds × Direct spot exchange rate
Cost of Z in $ = 105.00 × 1.6426
New cost of Z in $ = $172.47

TOTAL COST OF THE SY-20 (in dollars) = $415.34

Revenue from sale of the SY-20

Sale price (in yen) = Price in yen × Direct spot exchange rate
Sale price (in yen) = 42,000 × 0.01427551
Sale price (in yen) = $599.57

SY-20 SALES PRICE (in dollars) = $599.57

The dollar profit from the sale of the SY-20 is simply the sales revenue minus the total cost.

Dollar profit = Sales price – Total cost

Dollar profit = $599.57 – $415.34
Dollar profit = $184.23

The percentage profit is determined as the dollar profit divided by the total cost.

% profit = $ profit / Total cost

Chapter 19: Multinational
% profit =
Financial
$184.23
Management
/ $415.34
Integrated Case 3
© 2013 Cengage Learning.
% profitAll
= Rights Reserved.
44.36% May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

In this instance, we observe that a weakening of the dollar against the yen (all else equal) will result in
increased profitability for Yohe. The reason is that the sales price is denominated in yen and the yen is now
10% more valuable than the dollar.
 Component Y
Cos t of Y in $ = Cos t in euros × Direct s pot exchang e rate
Cos t of Y in $ = 20 .0 0 × 1.4 32 3
New cos t of Y in $ = $2 8 .65

Component Z
Cos t of Z in $ = Cos t in pounds × Direct s pot exchang e rate
Cos t of Z in $ = 10 5 .00 × 1.6 42 6
New cos t of Z in $ = $1 7 2 .4 7

TOTAL COST OF THE S Y-20 (in dollars ) = $ 41 5 .34

S ale price (in yen) = Price in yen × Direct s pot exchang e rate
S ale price (in yen) = 42 ,0 00 × 0.0 1 42 75 5 1
S ale price (in yen) = $5 9 9 .5 7

S Y-2 0 S ALES PRICE (in dollars ) = $ 59 9 .57

The dollar profit from the s ale of the S Y-20 is s imply the s ales revenue minus the total cos t.

Dollar profit = S ales price – Total cos t

Dollar profit = $ 5 99 .5 7 – $ 41 5 .34
Dollar profit = $ 1 84 .2 3

The percentag e profit is determined as the dollar profit divided by the total cos t.

% profit = $ profit / Total cos t

% profit = $ 1 84 .2 3 / $ 41 5 .34
% profit = 4 4 .36 %

In this ins tance, we obs erve that a weak ening of the dollar ag ains t the yen (all els e equal) will res ult in
increas ed profitability for Yohe. The reason is that the s ales price is denominated in yen and the yen is now
10 % more valuable than the dollar.

e. Applying interest rate parity, we can determine the return on 1-year securities in Switzerland.

TABLE 19.3 (abridged)

c
Forward exchange rates for the Swiss franc
Forward Rates
Spot Rate 30 days 90 days 180 days
Swiss franc 0.7702 0.7697 0.7687 0.7682
c
The Wall Street Journal (online.wsj.com), August 4, 2011.

Using our knowledge of interest rate parity, the following problem is set up.
Note that the U.S. nominal rate is on an annual basis.
Spot direct exchange rate 1.2983
Forward direct exchange rate (180 days) 1.3017
Home nominal annual interest rate 4.9%
Time to maturity on securities (in years) 0.5

f t / e0 = (1+ r h/2) / (1+ r f /2)

1.00265 = 1.02450 / 1+ rf /2
1.02179 = 1+ rf /2
2.179% = rf /2
4.36% = rf

f. Purchasing power parity allows us to establish the following problem.

Price in yen = 42,000

Yen/pound exchange rate = 126.57

Ph = (Pf ) × ( e0 )
42,000 = (Pf ) × 126.57
(in pounds) £332 = (Pf )

4 Integrated Case Chapter 19: Multinational Financial Management

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.