Chapter 18, Problem 15QP

a)

Summary Introduction

To find: The balance sheet in dollar.

Introduction:

Translation exposure is a risk associated with the changes in exchange rates. Here, when Country U based companies operate in foreign countries, their assets, liabilities, equities, or net income values change due to the fluctuations in exchange rates.

As a result, Country U’s companies operating in foreign countries must convert their financial statements to dollar by using current exchange rates. These changes in exchange rates can alter the financial statement mainly due to the translation exposure.

Explanation of Solution

Given information:

Company B international has operations in Dessert planet A. The balance sheet of the Arrakeen solaris shows the debt amount of 9,000 solaris, assets of 30,000 solaris, and equity of 21,000 solaris.

Computation of the balance sheet in dollar:

It is given that, assets is 30,000 solaris and the current exchange ratio is 1.20 solaris per dollar.

$\begin{array}{c}\text{Assets}=\frac{\text{Value of assets in foreign currency}}{\text{Current exchange rate}}\\ =\frac{30,000\text{ solaris}}{1.20\text{solaris per dollar}}\\ =\$25,000\end{array}$

Hence, the asset per dollar is $25,000.

Computation of the debt per dollar:

The debt per dollar is calculated by converting the debt value in solaris to dollar.

It is given that, debt is 9,000 solaris and the current exchange ratio is 1.20 solaris per dollar.

$\begin{array}{c}\text{Debt}=\frac{\text{Value of debt in foreign currency}}{\text{Current exchange rate}}\\ =\frac{9,000\text{ solaris}}{1.20\text{solaris per dollar}}\\ =\$7,500\end{array}$

Hence, the debt per dollar is $7,500.

Computation of the equity per dollar:

The equity per dollar is calculated by converting equity value in solaris to dollar.

It is given that, equity is 21,000 solaris and the current exchange ratio is 1.20 solaris per dollar.

$\begin{array}{c}\text{Equity}=\frac{\text{Value of equity in foreign currency}}{\text{Current exchange rate}}\\ =\frac{21,000\text{ solaris}}{1.20\text{solaris per dollar}}\\ =\$17,500\end{array}$

Hence, the equity per dollar is $17,500.

b)

Summary Introduction

To find: The balance sheet in dollar.

Explanation of Solution

Given information:

It is assumed that one year from today, the balance sheet in solaris which is accurately the same as at the starting of the year. The exchange rate is 1.30 solaris per dollar.

Computation of the balance sheet in dollar:

It is given that, assets is 30,000 solaris and the current exchange ratio is 1.30 solaris per dollar.

$\begin{array}{c}\text{Assets}=\frac{\text{Value of assets in foreign currency}}{\text{Current exchange rate}}\\ =\frac{30,000\text{ solaris}}{1.30\text{solaris per dollar}}\\ =\$23,076.92\end{array}$

Hence, the asset per dollar is $23,076.92.

Computation of the debt per dollar:

The debt per dollar is calculated by converting debt value in solaris to dollar.

It is given that, debt is 9,000 solaris and the current exchange ratio is 1.30 solaris per dollar.

$\begin{array}{c}\text{Debt}=\frac{\text{Value of debt in foreign currency}}{\text{Current exchange rate}}\\ =\frac{9,000\text{ solaris}}{1.30\text{solaris per dollar}}\\ =\$6,923.08\end{array}$

Hence, the debt per dollar is $6,923.08.

Computation of the equity per dollar:

The equity per dollar is calculated by converting equity value in solaris to dollar.

It is given that, equity is 21,000 solaris and the current exchange ratio is 1.30 solaris per dollar.

$\begin{array}{c}\text{Equity}=\frac{\text{Value of equity in foreign currency}}{\text{Current exchange rate}}\\ =\frac{21,000\text{ solaris}}{1.30\text{solaris per dollar}}\\ =\$16,153.85\end{array}$

Hence, the equity per dollar is $16,153.85.

c)

Summary Introduction

To find: The balance sheet in dollar.

Explanation of Solution

Given information:

The rate of exchange is 1.08 solaris for a dollar.

Computation of the balance sheet in dollar:

It is given that, assets is 30,000 solaris and the current exchange ratio is 1.08 solaris per dollar.

$\begin{array}{c}\text{Assets}=\frac{\text{Value of assets in foreign currency}}{\text{Current exchange rate}}\\ =\frac{30,000\text{ solaris}}{1.08\text{solaris per dollar}}\\ =\$27,777.78\end{array}$

Hence, the asset per dollar is $27,777.78.

Computation of the debt per dollar:

The debt per dollar is calculated by converting debt value in solaris to dollar.

It is given that, debt is 9,000 solaris and the current exchange ratio is 1.08 solaris per dollar.

$\begin{array}{c}\text{Debt}=\frac{\text{Value of debt in foreign currency}}{\text{Current exchange rate}}\\ =\frac{9,000\text{ solaris}}{1.08\text{solaris per dollar}}\\ =\$8,333.33\end{array}$

Hence, the debt per dollar is $8,333.33.

Computation of the equity per dollar:

The equity per dollar is calculated by converting equity value in solaris to dollar.

It is given that, equity is 21,000 solaris and the current exchange ratio is 1.08 solaris per dollar.

$\begin{array}{c}\text{Equity}=\frac{\text{Value of equity in foreign currency}}{\text{Current exchange rate}}\\ =\frac{21,000\text{ solaris}}{1.08\text{solaris per dollar}}\\ =\$19,444.44\end{array}$

Hence, the equity per dollar is $19,444.44.