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An article in Forbes noted that "accounting rules . . . can often change the way companies do business." Under the accounting rule covering receivables and payables denominated in foreign currencies, for example, "it is very important for companies to monitor their currency dealings." A case in point is R.J. Reynolds Industries, which "opened regional treasury offices in London and Hong Kong to keep tabs on worldwide cash flow and direct local borrowings." In that same article, a partner from a major accounting firm indicated that "more and more companies are centralizing their treasury-management function. Those that don't may be operating at a disadvantage."
REQUIRED:
a. Explain why the methods of accounting for foreign currencies might cause a company to centralize its treasury-management function and why those that don't may be operating at a disadvantage.
b. What is one of the main strategies used by U.S. companies to reduce the risks of holding receivables or payables denominated in non-U.S. currencies?
c. Explain how the strategy in (b) works. Specifically, how might it be used to reduce the possibility of violating a covenant on an outstanding debt?
Fama's Llamas has a WACC of 10.80 percent. The company's cost of equity is 14.2 percent, and its cost of debt is 8.4 percent. The tax rate is 40 percent.
The required rate of return on projects of both of their risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
Company needs to make a payment of e100,000 to a European supplier in three months. The current spot exchange rate is $1.14/e and the three-month forward rate is $1.03/e. The annual interest rate is 1.0% in the U.S. and 4.5% in Europe..
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