International Financial Management

International Financial Management

C45.0030.001

Problem Set IV

(Chapters 9, 10, & 11)

Due: Tuesday, 11/04

Question I (also problem 9.4 in MSE on p. 214)

Cleveland Pneumatic Company exports pneumatic valves to China. Sales are currently

1,000,000 units per year at the renminbi equivalent of $24 each. The Chinese renminbi

has been trading at Rmb 8/$, but a Hong Kong advisory service predicts the renminbi will

drop in value next week to Rmb 10/$, after which it will remain unchanged for at least a

year.

Accepting this forecast as given, Cleveland Pneumatic Company faces a pricing decision

in the face of the impending devaluation: either: (1) maintain the same renminbi price and

in effect sell for fewer dollars, in which case Chinese unit volume will not change, or (2)

maintain the same dollar price, raise the renminbi price in China to offset the devaluation,

and experience a 10% drop in unit volume. When computing the gross profit, you need to

subtract from the sales revenue in renminbi the direct costs, which are incurred in US$,

and represent 75% of the US sales price per unit.

a. What would be the US$ total direct cost in both cases?

b. What would be the short-run (one-year) impact of each pricing strategy on US $

gross profit?

c. Which pricing strategy do you recommend?

Question II (also problem 10.1 in MSE on p.235)

Montevideo Products, S.A., is the Uruguayan subsidiary of a US manufacturing

company. Its balance sheet for January 1 is shown below. The January 1 exchange rate

b/n US$ and the Uruguayo peso (PU) is PU 15/US$.

Balance Sheet as of Jan 1st, in ‘000 of Peso Uruguayo

Assets

Cash PU 60,000

Accounts Receivable PU 120,000

Inventory PU 120,000

Net Plant & equipment PU 240,000

PU 540,000

Liabilities & Net Worth

Current Liabilities PU 30,000

Long-term Debt PU 90,000

Capital Stock PU 300,000

Retained Earnings PU 120,000

PU 540,000 2

a. What is the US$ value of the net exposed assets of Montevideo on January 1, using the...