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Ch 12: Answers to End of Chapter Questions

1. Reducing Economic Exposure.

ANSWER: Baltimore Inc. could reduce its economic exposure by shifting some of its U.S. expenses to Europe. This may involve shifting its sources of materials or even part of its production process to Europe. It could also reduce its European revenue but this is probably not desirable.

2. Reducing Economic Exposure.

ANSWER: UVA Company has periodic outflow payments in Thai baht that are substantially more than its Thai baht inflow payments. UVA could reduce its economic exposure by attempt¬ing to increase sales in Thailand, which would generate additional Thai baht inflows.

3. Reducing Economic Exposure.

ANSWER: Albany may ask the Australian government to provide payment in U.S. dollars. Alternatively, Albany could attempt to shift some of its expenses to Australia, by either purchasing Australian supplies or shifting part of the production process to Australia. These strategies will increase Australian dollar outflows, so that the Australian dollar inflows and outflows are more balanced.

4. Tradeoffs When Reducing Economic Exposure.

ANSWER: An MNC may attempt to use several production plants. The production could be increased in countries whose home currency is weak (since demand for products in those countries would be higher). However, to have such flexibility requires that production plants are scattered. Consequently, the firm forgoes the economies of scale that may be achieved by establishing one large production plant.

5. Exchange Rate Effects on Earnings.

ANSWER: A U.S. based MNC's consolidated earnings are reduced by the translation effect when foreign currencies depreciate. Foreign earnings are translated at the average exchange rate over the fiscal year, so low values of foreign currencies result in a low level of consolidated earnings.

9. Comparing Degrees of Economic Exposure.

ANSWER: Carlton Company is subject...