Intervention Effects on Corporate Performance . Assume you have a subsidiary in

Question

Intervention Effects on Corporate Performance. Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent US$200,000 in interest each month. Australia has just increased its interest rate in order to curb domestic consumption, and the value of its currency increases (Australian dollar, A$). In each case below state whether these actions would increase, decrease, or have no effect on the following:

a.   The volume of your subsidiary’s sales in Australia (measured in A$) 4 Marks

b.   The cost to your subsidiary of purchasing materials (measured in A$) 4 Marks

c.   The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A$). 4 Marks

            Also, briefly explain why in each answer.

Explanation / Answer

(a) The sales of the subsidiary will remain decrease, as the local consumers will be borrowing from banks in Australia & as the rates will go up , the costs will also go up & hence demand will fall.

(b) Since Australian Currency will appreciate, the US $ will fall. Since Hong Kong is tied to US, the hONG kONG & us $ both will fall. This will lead to an increase in prices for the subsidiary.

(c) Since The AS$ will appreciate, the cost of payment of interest will reduce.

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