Foreign currency exposure


Question: Zapata Auto Parts, the Mexican affiliate of American Diversified, company had the following balance sheet on January 1

Assets (Mex$ millions)

Liabilities (Mex$ millions)

Cash, marketable securities

Mex$1,000

 

 

Accounts receivable

50,000

Current liabilities

Mex$47,000

Inventory

32,000

Long-term debt

12,000

Fixed assets

111,000

Equity

135,000

 

Mex$194,000

 

Mex$194,000

The exchange rate on January 1 was Mex$8,000 = $1.

[A] Determine Zapata's FASB 52 peso translation exposure on January 1?

[B] Assume 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]. Estimate this due to its translation exposure if it uses the funds to pay a dividend to its parent? If it uses the funds to rise its cash position?

 

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Finance Basics: Foreign currency exposure
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