Given the information above, which hedging alternative would be preferable? Please show all relevant workings in support of your recommendation.
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MMA plc., is a UK-based manufacturer of heavy machine components for the power industry. MMA exports a significant proportion of its products to clients in the US. In order to compete with other US suppliers of heavy machine components, MMA prices its exports in US dollars. It is March 2021 and MMA has just shipped a large consignment worth $50 million to TLP Inc., one of MMA’s major clients in the US. Payment for this shipment is due in 90-days.
MMA treasury department is concerned about the recent volatility of the dollar[1]pound exchange rates and has suggested that its exposure to the US dollar should be hedged.
The following currency and
Spot Rate (bid – ask): US$1.5077/£ - US$1.5379/£
Barclays 90-day forward quote ((bid – ask): US$1.5025/£ - US$1.5432
90-day dollar deposit interest rate: 0.8% per annum
90-day pound deposit interest: 1.2% per annum
90-day US dollar borrowing rate: 1.2% per annum
90-day pound borrowing rate: 1.8% per annum
Given the information above, which hedging alternative would be preferable? Please show all relevant workings in support of your recommendation.
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- Doman Industries Ltd., whose products are sold in 30 countries worldwide, is an integrated Canadian forest products company. Doman sells the majority of its lumber products in the United States and a significant amount of its pulp products in asia.Demon also has loans from other countries. For example, on June 18, 2018, the company borrowed US$160 million at an annual interest rate of 12%. Demon must repay this loan, and interest, in U.S.dollars One of the challenges global companies face is to make themselves attractive to investors from other currencies. This is difficult to do when different accounting rules in different countries blur the real impact of earnings. For example, in 2018 Doman reported a loss of $2.3 million, using Canadian accounting rules.Had it reported under U.S. accounting rules, its loss would have been $12.1 million. Many companies that want to be more easily compared with U.S and other global competitors have switched to U,S. accounting principles. Canadian…Doman Industries Ltd., whose products are sold in 30 countries worldwide, is an integrated Canadian forest products company. Doman sells the majority of its lumber products in the United States and a significant amount of its pulp products in Asia. Demon also has loans from other countries. For example, on June 18, 2018, the company borrowed US$160 million at an annual interest rate of 12%. The demon must repay this loan, and interest, in U.S.dollars One of the challenges global companies face is to make themselves attractive to investors from other currencies. This is difficult to do when different accounting rules in different countries blur the real impact of earnings. For example, in 2018 Doman reported a loss of $2.3 million, using Canadian accounting rules. Had it reported under U.S. accounting rules, its loss would have been $12.1 million. Many companies that want to be more easily compared with the U.S and other global competitors have switched to U. S. accounting principles.…Fergusson Corporation, a U.S. company, manufactures components for the automobile industry. In the past, Fergusson purchased actuators used in its products from a supplier in the United States. The company plans to shift its purchases to a supplier in Portugal. Fergusson's CFO expects to place an order with the Portuguese supplier in the amount of 200,000 euros in three months. In contemplation of this future import, the CFO purchased a euro call option to hedge the cash flow risk that the euro appreciate against the U.S. dollar over the next three months. The CFO is aware that a foreign currency option used to hedge the cash flow risk associated with a forecasted foreign currency transaction may be designated as a hedge for accounting purposes only if the forecasted transaction is probable. However, he is unsure how he should demonstrate that the anticipated import purchase from Portugal is likely to occur. He wonders whether management's intention to make the purchase is…
- New Life is a multinational distribution company that started operating a Branch in Barbados on 1 January 2023. The company’s Head Office is in the Cayman Islands and is part of a group that earns more than USD 850 million for the year. It employs some of its staff from Barbados and imports goods and services from the US, Cayman Islands, and other Caribbean countries. New Life's repatriation policy is to transfer 50 % to 70% of its after-tax profits to the Cayman Islands. The company was of the view that for the first year of operation, there was a window of no tax obligations. In December 2023, the company realized that its understanding was not correct and therefore engaged UWI Tax Consulting Services Limited to provide tax advisory and tax compliance services. Your Group was assigned this engagement. Question: What are the tax matters that needs to be considered when operating in Barbados including any tax benefits or incentives they may consider?Spindler, Inc. (a U.S.-based company), imports surfboards from a supplier in Brazil and sells them in the United States. Purchases are denominated in terms of the Brazilian real (BRL). During 2020, Spindler acquires 270 surfboards at a price of BRL 1,600 per surfboard, for a total of BRL 432,000.00. Spindler will pay for the surfboards when it sells them. Relevant exchange rates are as follows: Date September 1, 2020 December 1, 2020 December 31, 2020 March 1, 2021 b. U.S. Dollar a. Assume that Spindler acquired the surfboards on September 1, 2020, and made payment on December 1, 2020. What is the effect of the exchange rate fluctuations on reported income in 2020? C per Brazilian Real (BRL) b. Assume that Spindler acquired the surfboards on December 1, 2020, and made payment on March 1, 2021. What is the effect of the exchange rate fluctuations on reported income in 2020 and 2021? c. Assume that Spindler acquired the surfboards on September 1, 2020, and made payment on March 1, 2021.…New Life is a multinational distribution company that started operating a Branch in Barbados on 1 January 2023. The company’s Head Office is in the Cayman Islands and is part of a group which earns more than USD 850 million for the year. It employed some of its staff from Barbados and imports good and services from the US, Cayman Islands, and other Caribbean countries. New Life repatriation policy is to transfer 50 % to 70% of its after-tax profits to the Cayman Islands. The company was of the view that for the first year of operation there was a window of no tax obligations. In December 2023, the company realized that their understanding was not correct and therefore engaged UWI Tax Consulting Services Limited to provide tax advisory and tax compliance services. Your Group was assigned this engagement. Required.Advice New Life of the tax matters that needs to be considered when operating in Barbadosincluding any tax benefits or incentives they may consider.
- Spindler, Inc. (a U.S.-based company), imports surfboards from a supplier in Brazil and sells them in the United States. Purchases are denominated in terms of the Brazilian real (BRL). During 2020, Spindler acquires 420 surfboards at a price of BRL 1,600 per surfboard, for a total of BRL 672,000.00. Spindler will pay for the surfboards when it sells them. Relevant exchange rates are as follows: Date U.S. Dollar perBrazilian Real (BRL) September 1, 2020 $ 0.230 December 1, 2020 0.220 December 31, 2020 0.240 March 1, 2021 0.225 Assume that Spindler acquired the surfboards on September 1, 2020, and made payment on December 1, 2020. What is the effect of the exchange rate fluctuations on reported income in 2020? Assume that Spindler acquired the surfboards on December 1, 2020, and made payment on March 1, 2021. What is the effect of the exchange rate fluctuations on reported income in 2020 and 2021? Assume that Spindler acquired the surfboards on…New Life is a multinational distribution company that started operating a Branch in Barbados on1 January 2023. The company’s Head Office is in the Cayman Islands and is part of a group whichearns more than USD 850 million for the year. It employed some of its staff from Barbados and imports good and services from the US, Cayman Islands, and other Caribbean countries. New Life repatriation policy is to transfer 50 % to 70% of its after-tax profits to the Cayman Islands.The company was of the view that for the first year of operation there was a window of no taxobligations. In December 2023, the company realized that their understanding was not correct and therefore engaged UWI Tax Consulting Services Limited to provide tax advisory and tax compliance services. Your Group was assigned this engagement. Required.Advice New Life of the tax matters that needs to be considered when operating in Barbadosincluding any tax benefits or incentives they may consider.Lalua Co is a US firm has planning to export its products to Singapore since its decision to supplement its declining U.S. sales by exporting there. Furthermore, Lalua Co. also has recently begun exporting to a retailer in United Kingdom. Below are the details of transactions for Lalua Co. through out of the year: - i. Blades has forecasted sales in the United States of 520,000 pairs of Speedos at regular prices which is $115; exports to Singapore of 180,000 pairs of speedos for SGD25 a pair; and exports to the United Kingdom of 200,000 pairs of Speedos for £80 per pair. ii. Cost of goods sold for 800,000 pairs of speedos are incurred in Singapore with the price of SGD 15; the remainder is incurred in the United States, where the cost of goods sold per pair of Speedos runsapproximately $70. iii. Fixed cost are $2 million and variable operating expenses other than costs of goods sold represent approximately 12 percent of U.S. sales. All fixed and variable operating expenses other than…
- Jackson, a U.S. company, acquires a variety of raw materials from foreign vendors with amounts payable in foreign currency (FC). The company needs to acquire 20,000 units of raw materials, and the goods are expected to have a price of 100,000 FC. Assume that the inventory can be subsequently sold to U.S. customers for $160,000. Jackson is contemplating committing to the purchase of the inventory on September 1 with delivery on November 1. However, rather than making a commitment, the company could forecast a probable purchase of inventory with delivery on November 1. In either case, assume that on September 1 the company would either (a) acquire a forward contract to buy 100,000 FC with a forward date of November 1 or (b) acquire an option to buy FC in November at a strike price of $1.250. The option premium is expected to cost $2,100.Various spot rates, forward rates, and option values are as follows: Spot Rate Forward Rate forNovember 1 Time Value ofOption September 1 . . . .…ABC Inc. is a US company that is considering moving its manufacturing facility to Mexico. The Mexican subsidiary manufactures toys for kids which will be sold to Mexican households in big cities. The cost to purchase and equip the facility is 20,000,000 Mexican pesos. The company's production, administrative and sales department have supplied the estimates of earnings and annual changes in net working capital, interest rates in Mexico and the US, the current peso/dollar exchange rate as follows: year US interest rate Mexico's interest rate Pesos per dollar Initial investment EBIT Change in net working capital Capital expenditure Unit: Mexican Peso 0 18 -20,000,000 1 2 3 1.50% 1.50% 1.50% 7.25% 7.25% 7.25% 100,000 140,000 948,000 250,000 40,000 40,000 0 0 Perform an NPV analysis to determine whether this is a good investment, under the following assumptions: a) The peso/dollar exchange rate is currently 18pesos/$, and the peso is expected to appreciate/depreciate at a rate justified by…Azar Plc, which imports optical equipment from Germany for sale to UKproviders of ophthalmic services, has ordered 50 ophthalmic testing machines from a German supplier at a price of Euro 7,500 each. The supplier will deliver the machines during the coming month, but Azar Plc has agreed with the supplier that it will not have to pay for the machines until Azar Plc has installedthem and been paid by its customers, so it has negotiated payment in three months’ time. Azar Plc has an arrangement with its banks whereby it can borrow to cover short-term cash shortages at 2.0% above base rate, and can invest surplus funds at 0.25% below base rate, in both the UK and Germany. Current exchange rates Euro/£Spot 1.1415 -3 months forward 1.1424365 -Current base rates 1.1385Germany 1.0%UK 0.5% Using the information above, do calculations to evaluate three ways in which Azar Plc take action to reduce…