User Account

All Pages

What should larkin do

Assignment Help Financial Accounting
Reference no: EM131828352

On May 1, Larkin Hydraulics, a wholly owned subsidiary of Caterpillar (U.S.), sold a 12-megawatt compression turbine to Rebecke-Terwilleger Company of the Netherlands for €4,000,000 payable as €2,000,000 on August 1 and €2,000,000 on November 1. Larkin derives its price quote of €4,000,000 on April 1 by dividing it's normal US dollar sales price of $4,320,000 by the then current spot rate of $1.0800/€.

By the time the order was received and booked on May 1, the euro had strengthened to $1.1000/€, so the sale was in fact worth €4,000,000 c $1.1000/€ = $4,400,000. Larkin had already gained an extra $80,000 from favorable exchange rate movements. Nevertheless, Larkin's Director of finance now wondered if the firm should head against a reversal of the recent trend of the euro. Four approaches were possible:

1. Hedge in the forward market: The 3-month forward exchange quote was $1.1060/€ and the 6-month forward quote was $1.1130/€.

2. Hedge in the money market: Larkin could borrow the euros from the Frankfurt branch of its US bank at 8.00% per annum.

3. Hedge with foreign currency options: August put options were available at strike price of $1.1000/€ for a premium of 2.0% per contract, and November put options were available at $1.1000/€ for a premium of 1.2%. August call options at $1.1000/€ could be purchased for a premium of 3.0%, and November call options at $1.1000/€ were available at a 2.6% premium.

4. Do nothing: Larkin could wait until the sales proceeds were received in August and November, hope the recent strengthening of the euro would continue, and sell the euros received for dollars in the spot market.

Larkin estimates the cost of equity capital to be 12% per annum. As a small firm, Larkin Hydraulics is unable to raise funds with long-term debt. US T-bill yield 3.6% per annum. What should Larkin do?

Reference no: EM131828352

Questions Cloud

Compare the accounting records by an internal auditor : The internal control procedures in Dayton Company result in the following provisions. Identify the principles of internal control that are being followed.
Describe the effect each movement had on society : Describe the effect each movement had on society. How did the movement change public opinion on gender issues? What other changes did it bring?
What is the maximum number of frames per second : What is maximum number of frames per second (round down to a whole number) that this system can display in 256 simultaneous colors at a resolution of 640 480?
How does this theory address gender traits and differences : Choose one theory from your readings. What led to this theory's development? How does this theory address gender traits and differences?
What should larkin do : Larkin estimates the cost of equity capital to be 12% per annum. As a small firm, Larkin Hydraulics is unable to raise funds with long-term debt.
How you prioritize it projects : What significance do IT project have within an organization? How you prioritize IT projects?
What content would you analyze : Create an original social science research question that could use content analysis to help answer that research question.
Quality of data used when analyzing risks : Chapter 11 of the PMBOK® Guide discusses examining the quality of data used when analyzing risks. How is it accomplished, and why is it so important to good ris
Discuss the case of Jolson Company : Jolson Company has the following internal control procedures over cash receipts. Identify the internal control principle that is applicable to each procedure.

Reviews

Write a Review

Financial Accounting Questions & Answers

  Calculate payback and the net present value

What required annual yield must be earned before the investment makes economic sense and calculate payback and the net present value.

  Employees deal with change

Discuss what organizational change is and why being able to manage it is important. Also, list and discuss some ways managers can help their employees deal with change. 2 page with referances NO plagiarism.

  What is the debt to equity ratio for hd chocolates

What is the debt to equity ratio for HD Chocolates? Where would you look to find the amount of accumulated depreciation for HD Chocolate? What is the current ratio for HD Chocolate? How do we determine if a liability is current?

  Prepare absorption costing income statement for quarter end

The following data relate to the operations of Shilow Company, a wholesale distributor of consumer goods: Current assets as of March 31: Cash $ 8,900 Accounts receivable $ 25,600 Inventory $ 48,000 Building and equipment, Complete the following: Budg..

  Calculate end-of-year balanced for the fund balance

Calculate end-of-year balanced for the Fund Balance and Budgetary Fund Balance accounts that would be reported on the Village’s balance sheet prepared as of June 30, 2010. Show all necessary work.

  Equal partners in family partnership

Bob and Jane, brother and sister, are equal partners in a family partnership that owns 400 shares of the Sibling Corporation. Their grandfather owns the remaining 100 shares of Sibling Corporation. How many shares of stock are owned directly and indi..

  What is joes breakeven point in haircuts and sales dollars

Joe has been cutting hair in Everyville, USA for the past 40 years. Customers know they will get a reasonably priced haircut in a relaxed atmosphere and continue to support Joe’s shop despite the frequent changes in the hair styling industry. Prepare..

  Indicate each of the given actions is related to acquisition

Indicate whether each of the following actions is primarily related to (a) acquisition of long-term assets, (b) evaluating the financing of long- term assets, or (c) applying accrual accounting to long-term assets:

  Prepare an amortization schedule of any bond discount

Frank Worldwide Inc. manufactures cycling equipment. Recently the vice-president of operations of the company has requested construction of a new plant to meet the increasing demand for the company's bikes. Determine the selling price of the bonds. P..

  What could be the sales budget for march

The planned selling price is $150 per unit. What could be the sales budget for March?

  Three-year zero-interest-bearing trade note1 which of the

three-year zero-interest-bearing trade note.1. which of the following methods of determining bad debt expense does not

  Prepare division income statements for spring waters inc

Prepare division income statements assuming the transfer price is at the external market price of $0.40 per gallon. Repeat part a. assuming a negotiated transfer price of $0.30 per gallon is used.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd