Suppose that Salem Co, a U.S.-based MNC that both purchases supplies from Canada and sells exports in Canada, is seeking to measure the economicexposure of its cash flows. Salem wishes to analyze how its cash flows might change under different exchange rates for the Canadian dollar (the onlyforeign currency in which it deals).Salem estimates it's cash flows from both the U.S., in dollars, and Canada, in Canadian dollars. These figures are summarized in the following table.U.S. CanadaSales-Cost of materials$315C$5$45C$150-Operating expenses$55-Interest expenses$5C$10Cash flows$210-$C155Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios.The following table shows Salem's cash flows under each of these exchange rates.For each exchange rate scenario, fill in rows (2), (3), (5), (6), (9), and (10). Finally, fill in the last row for net cash flows in U.S. dollars for eachexchange rate. Salem believes that the value of the Canadian dollar will be $0.70, $0.75, or $0.80, and seeks to analyze its cash flows under each of these scenarios.The following table shows Salem's cash flows under each of these exchange rates.For each exchange rate scenario, fill in rows (2), (3), (5), (6), (9), and (10). Finally, fill in the last row for net cash flows in U.S. dollars for eachexchange rate.Sales(1) U.S. Sales(2) Canadian Sales(3) Total Sales in U.S. $Exchange Rate ScenarioC$1=$0.70Exchange Rate ScenarioC$1=$0.75Exchange Rate ScenarioC$1=$0.80(Millions)(Millions)(Millions)$315$315$315C$5 = $C$5 = $3.75C$5 = $$318.75Cost of Materials and Operating Expenses(4) U.S. Cost of Materials$45$45$45(5) Canadian Cost of MaterialsC$150 = $C$150=$112.50C$150 = $(6) Total Cost of Materials in U.S. $$157.50(7) Operating Expenses$55$55$55Interest Expense(8) U.S. Interest Expense(9)Canadian Interest Expense(10) Total Interest Expenses in U.S.Cash Flows in U.S.$ before Taxes$5$5$5C$10 = $C$10 = $7.50C$10 = $$+A$12.50$+A$93.75+A

The cash flows which are based upon the exchange rates depend upon the rate of exchange between the…

Answered: Suppose that Salem Co, a U.S.-based MNC…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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