Assume That Mill Corp $\mu$ _t

Where the Term on the Left-Hand Side

question 28

Multiple Choice

Assume that Mill Corp., a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCF_t = a₀ + a₁e_t + $\mu$ _t

Where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and e_t is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a₁ of 2. This indicates that if the foreign currency:

• A) appreciates by 1 percent, Mill's cash flows will decline by 2 percent.
• B) appreciates by 1 percent, Mill's cash flows will decline by .2 percent.
• C) depreciates by 1 percent, Mill's cash flows will increase by 2 percent.
• D) depreciates by 1 percent, Mill's cash flows will decline by 2 percent.
• E) None of these are correct.

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Definitions:

Strategic Planning

A process by which organizations define their strategy or direction and make decisions on allocating their resources to pursue this strategy.

Operational Planning

The process of planning short-term actions and resources towards achieving medium-term objectives and strategies.

Budgeting

The process of creating a plan to spend your money, outlining projected income and expenses over a period.

Dividend Payout Ratio

The fraction of net earnings a firm pays to its shareholders as dividends, usually expressed as a percentage.