Question #87
Reading: Reading 10 Multinational Operations
PDF File: Reading 10 Multinational Operations.pdf
Page: 49
Status: Unattempted
Question
A Canadian firm owns a foreign subsidiary in the U.S. In 2002, sales were USD1,000,000 and the USD/CAD exchange rate was 0.6329. In 2003, sales were also USD1,000,000 but the exchange rate was 0.7484. What is the impact of the change in the value of the CAD on the parent company's translated sales? Sales will:
Answer Choices:
A. decline by 15%
B. decrease by 18%
C. increase by 18%
Explanation
While sales were flat at USD 1,000,000 in local currency terms, after translation the parent
firm would report sales of CAD 1,336,184 for 2003 (= USD 1,000,000 / 0.7484) versus sales
of CAD 1,580,028 for 2002 (= USD 1,000,000 / 0.6329). The 15% sales decline reported by
the Canadian firm (CAD 1,336,184 versus CAD 1,580,028) is a flow effect. Even though
there was no sales growth in the subsidiary, the parent firm still shows a 15% decrease in
revenues from the subsidiary due solely to exchange rate effects. Note that because the
subsidiary sales are constant the total exchange rate effect can be measured as (0.6329 /
0.7484) − 1 = −0.15.