Assume That Mill Corporation,a U $P C F_{t}=a_{0}+a_{1} e_{t}+\mu t$

question 44

Multiple Choice

Assume that Mill Corporation,a U.S.-based MNC,has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements:
$P C F_{t}=a_{0}+a_{1} e_{t}+\mu t$
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
$a_{1}$ of 2.This indicates that:

• A) if the foreign currency appreciates by 1%, Mill's cash flows will decline by 2%.
• B) if the foreign currency appreciates by 1%, Mill's cash flows will decline by .2%.
• C) if the foreign currency depreciates by 1%, Mill's cash flows will increase by 2%.
• D) if the foreign currency depreciates by 1%, Mill's cash flows will decline by 2%.
• E) none of the above

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