​Magent Co

question 38

Multiple Choice

​Magent Co. is a U.S. company that has exposure to the Swiss franc (SF) and Danish kroner (DK) . It has net inflows of SF200 million and net outflows of DK500 million. The present exchange rate of the SF is about $.40 while the present exchange rate of the DK is $.10. Magent Co. has not hedged these positions. The SF and DK are highly correlated in their movements against the dollar. If the dollar weakens, then Magent Co. will:

• A) ​benefit, because the dollar value of its SF position exceeds the dollar value of its DK position.
• B) ​benefit, because the dollar value of its DK position exceeds the dollar value of its SF position.
• C) ​be adversely affected, because the dollar value of its SF position exceeds the dollar value of its DK position.
• D) ​be adversely affected, because the dollar value of its DK position exceeds the dollar value of its SF position.

---

Definitions:

Time Value of Money

The belief that possessing money in the present is worth more than holding the same amount later on because it has the potential to increase in value.

Capital Budgeting Methods

Techniques used by companies to evaluate the desirability of investments or expenditures. Major methods include net present value (NPV), internal rate of return (IRR), and payback period.

Accounting Rate of Return

A measure of the return expected on an investment, calculated by dividing the average annual profit by the initial investment cost.

After-Tax Net Income

The amount of profit a company remains with after all tax expenses have been deducted from its total income.