Computation of loss due to foreign currency exposure

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Reference no: EM1316508

Computation of loss due to Foreign Currency Exposure.

Zapata Auto Parts, the Mexican affiliate of American Diversified, Inc., had the following balance sheet on January 1

Assets (Mex$ millions)		Liabilities (Mex$ millions)
Cash, marketable securities	Mex$1,000
Accounts receivable	50,000	Current liabilities	Mex$47,000
Inventory	32,000	Long-term debt	12,000
Fixed assets	111,000	Equity	135,000
	Mex$194,000		Mex$194,000

The exchange rate on January 1 was Mex$8,000 = $1.

a. What is Zapata's FASB 52 peso translation exposure on January 1?

b. Suppose the exchange rate on December 31 is Mex$12,000. What will be Zapata's translation loss for the year?

c. Zapata can borrow an additional Mex$15,000 (in millions). What will this due to its translation exposure if it uses the funds to pay a dividend to its parent? If it uses the funds to increase its cash position?

Reference no: EM1316508

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