(5 points) PART 1 You have the following information on a US clothing firm calle
ID: 2553135 • Letter: #
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(5 points) PART 1 You have the following information on a US clothing firm called Worldwide Pants that manufactures and sells designer jeans in the U.S. with imported denim from Brazil priced in reals (BRL). All sales are made in the US for USDs. Calculate the dollar Operating CFs After-taxes (OCFAT) for each part of the problem, like Exhibit 9.6 in the textbook. For parts b-e, compare your results to part a (the base case) to determine the overall conversion effect or competitive effect, and report the difference in OCFAT. NO DISCOUNTING IS NECESSARY. Annual Sales (Q) = 500,000 units Retail Price (P) = $90.00 Variable Cost for domestic inputs = $32/unit Variable Cost for imported denim = BRL64 /unit Fixed Costs = $4.0m Depreciation = $2.0m Tax Rate = 32% a. Calculate Worldwide Pants’ after-tax Operating CFs in dollars if the current exchange rate S = BRL1.7520 / $ (this will establish the base case). b. Calculate and report the conversion effect on the firm’s operating CFs in dollars if the ex-rate changes to S = BRL2.0850 / $ (assuming everything else stays the same). Compare your results to the base case and calculate and report the dollar change in OCFAT, which is the conversion effect. c. Calculate and report the conversion effect on the firm’s operating CFs in dollars if the ex-rate changes to S=BRL1.4225 / $ (assuming everything else stays the same). Compare your results to the base case and calculate and report the dollar change in OCFAT (conversion effect). d. Calculate and report the competitive effect on the firm’s operating CFs in dollars if the ex-rate changes to S=BRL1.4225/$ assuming the firm has little competition, has significant brand loyalty, faces an inelastic demand (elasticity coefficient = -0.50), and it raises it price by 10% to offset some of the adverse currency change. (%Qd = Elasticity Coefficient X % Price increase.) Compare your results to the base case and calculate and report the dollar change in OCFAT (competitive effect). The variable cost of the locally sourced domestic input does not change.
9.6 Exhibit BELOW
9.6 Exhibit BELOW
Sales (50,000 units at £ 1 ,000/unit) £50,000,000 Variable costs (50,000 units at £650/unit)a 32,500,000 Fixed overhead costs 4,000 ,000 Depreciation allowances 1 ,000,000 Net profit before tax £ 12,500,000 Income tax (at 50%) 6,250,000 Profit after tax 6,250,000 Add back depreciation 1 ,000,000 Operating cash flow in pounds £ 7,250,000 Operating cash flow in dollars $11 ,600,000Explanation / Answer
a. OCFAT when exchange rate is $ = BRL1.7520/$ Sales (500,000 units at $90/unit) $45,000,000 Variable cost (500,000 units at 69/unit) $34,500,000 Fixed Cost $4,000,000 Depreciation $2,000,000 Net profit before tax $4,500,000 Income Tax @ 32% $1,440,000 Net profit after tax $3,060,000 Add: Depreciation $2,000,000 Operating Cash Flow After Tax $5,060,000 Variable costs for domestic inputs $32 Variable costs for imported denims $37 (BRL64/BRL1.7520) Total variable costs $69 b. Conversion effect if exchange rate changes to $ = BRL2.0850/$ If the exchange rate increases, it will reduce the variable cost for imported denims and increase the operating profit in dollars Variable Cost for imported denim $31 (BRL64/BRL2.0850) Sales (500,000 units at $90/unit) $45,000,000 Variable cost (500,000 units at 63/unit) $31,500,000 Fixed Cost $4,000,000 Depreciation $2,000,000 Net profit before tax $7,500,000 Income Tax @ 32% $2,400,000 Net profit after tax $5,100,000 Add: Depreciation $2,000,000 Operating Cash Flow After Tax $7,100,000 Conversion effect = $7100000 - $5060000 = $2040000 Conversion effect = $6 x 500000 = $3000000 x 68% = $2040000 68% = 1-tax rate c. Conversion effect if exchange rate changes to $ = BRL1.4225/$ If the exchange rate decreases, it will increase the variable cost for imported denims and decrease the operating profit in dollars Variable Cost for imported denim $45 (BRL64/BRL1.4225) Sales (500,000 units at $90/unit) $45,000,000 Variable cost (500,000 units at 77/unit) $38,500,000 Fixed Cost $4,000,000 Depreciation $2,000,000 Net profit before tax $500,000 Income Tax @ 32% $160,000 Net profit after tax $340,000 Add: Depreciation $2,000,000 Operating Cash Flow After Tax $2,340,000 Conversion effect = $2340000 - $5060000 = -$2720000 Conversion effect = -$8 x 500000 = -$4000000 x 68% = -$2720000 68% = 1-tax rate c. Conversion effect if exchange rate changes to $ = BRL1.4225/$, assuming the firm has little competition If the exchange rate decreases, it will increase the variable cost for imported denims and decrease the operating profit in dollars Variable Cost for imported denim $45 (BRL64/BRL1.4225) Sales (525,000 units at $99/unit) $51,975,000 Variable cost (525,000 units at 77/unit) $38,500,000 Fixed Cost $4,000,000 Depreciation $2,000,000 Net profit before tax $7,475,000 Income Tax @ 32% $2,392,000 Net profit after tax $5,083,000 Add: Depreciation $2,000,000 Operating Cash Flow After Tax $7,083,000 Conversion effect = $7083000 - $5060000 = $2023000 Due to elasticity coefficent 5%increase in quantity will result in 10% price increase Increase in Quantity 500000+25000 = 525,000 units Increase in price $90+$9= $99
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