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International Finance

5. Bakrie, an Indonesian conglomerate, is assessing the likely consequences of the rupiah's precipitous decline on its different businesses. These businesses include a telecommunications company that is building a network (using mostly imported equipment) throughout Jakarta to offer wireless service to its residents, a company that sells pipe to the Western firms exploiting Indonesia's oil and gas fields, and a big agricultural business (54% of its revenues are in dollars, compared with 40% of its costs) that owns rubber and palm plantations feeding a large refining and distribution operation.

a. Assess the likely impact of the rupiah's depreciation on Bakrie's three different businesses.

b. Which of Bakrie's businesses will be most hurt by the rupiah's fall? Will any of these businesses actually benefit from rupiah depreciation?

c. Bakrie has about $1 billion in foreign debt. Will this debt increase or decrease its currency exposure? Explain.

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a. Assess the likely impact of the rupiah's depreciation on Bakrie's three different businesses.

ANSWER. The telecommunications has its equipment costs in foreign currency whereas its revenues will be in devalued rupiah. Although its operating costs will be in rupiah as well, most expenses on a wireless network come from equipment costs. Hence, the net effect of rupiah ...

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