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International Finance Problem

Egyptian Ingot is the Egyptian subsidiary of TransMediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. TransMediterranean's home currency is the British pound. Egyptian Ingot's December 31 balance sheet follows. At the date of this balance sheet, the exchange rate between Egyptian pounds and British pounds sterling was E5.50 / UK pounds.

Assets (Egyptian pounds)
Cash 16,500,000
Accounts Receivable 33,000,000
Inventory 49,500,000
Net Plant and Equipment 66,000,000

Total Assets 165,000,000

Liabilities and Net Worth
Accounts payable 24,750,000
Long-term debt 49,500,000
Invested capital 90,750,000

Total Liab & Capital 165,000,000

a) What is Egyptian Ingot's contribution to the translation exposure of TransMediterranean on December 31, using the current rate method?

b) Calculate the translation exposure loss to TransMediterranean if the exchange rate at the end of the following quarter is E6.00 / UK pounds. Assume that all balance sheet accounts are the same at the end of the quarter as they were at the beginning.

Solution Preview

See the attached file. Thanks

Part a: Translation Exposure

Balance Sheet of Egyptian Ingot, Ltd.
Translated
Egyptian Pounds Exchange Rate Accounts
Assets Statement (UK Pound/EP) UK Pound
Cash 16,500,000 0.181818 3,000,000
Accounts receivable 33,000,000 0.181818 6,000,000
Inventory ...

Solution Summary

Egyptian Ingot is the Egyptian subsidiary of TransMediterranean Aluminum, a British multinational that fashions automobile engine blocks from aluminum. TransMediterranean's home currency is the British pound. Egyptian Ingot's December 31 balance sheet follows. At the date of this balance sheet, the exchange rate between Egyptian pounds and British pounds sterling was E5.50 / UK pounds.

$2.19