Posted: November 8th, 2014

ABC Corporation regularly purchases nutritional supplements from a supplier in Japan with the invoice price denominated in Japanese Yen.

ABC Corporation regularly purchases nutritional supplements from a supplier in Japan with the invoice price denominated in Japanese Yen.

ABC has experienced several foreign exchange losses in the past year due to increase in the U.S. dollar price to Japanese currency. As a result, ABC’s CEO has asked you to investigate the possibility of using derivative financial instruments—specifically foreign currency forward contracts and foreign currency options—to hedge the company’s exposure to foreign exchange risk.
Required
•    Draft a memo to the CEO comparing the advantages and disadvantages of using forward contracts and options to hedge foreign exchange risk. Make a recommendation regarding which type of hedging instrument you believe the company should employ and provide your justification for this recommendation.
5. Discuss the major differences in the calculation of income between the historical cost model and the current cost model of accounting. Explain the justifications for using each of the aforementioned cost models. Provide your analysis of which method provides for more accurate calculation of income.
6.
A foreign company prepares its financial statements in a foreign language and does not provide any convenience translation.
Required
•    How might this affect an analyst’s decision to invest in this company? What are different features of financial statements that a foreign company might translate in a convenience translation? As an investment advisor, explain to your clients why they should be careful when comparing financial ratios across companies in different countries.

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7. NEW Corporation, based in Sydney, Australia, has a wholly owned subsidiary in Taiwan. The Taiwanese subsidiary manufactures bicycles at a cost of $20 per unit and sells the bicycles to NEW Corp at an FOB shipping point price of $100 each. NEW pays shipping costs of $10 per bicycle and an import duty of 10 percent on the $100 invoice price. NEW sells the bicycles in Australia for $200 each. The Australian tax authority discovers that NEW’s Taiwanese subsidiary also sells its bicycles to uncontrolled Australian customers at a price of $80 each. Accordingly, Australian tax authority makes a transfer pricing adjustment to NEW’s tax return that decreases NEW’s cost of goods sold by $20 per bicycle. An offsetting adjustment (refund) is made for the import duty previously paid. The effective tax rate in Taiwan is 25 percent and in Australia is 36 percent.
Required
•    Discuss NEW Corporations decision to allow its Taiwanese subsidiary to charge a higher price to NEW than to uncontrolled customers in Australia. Assess the likelihood that the Taiwanese tax authority will provide a correlative adjustment to NEW Corp.
8. It is impossible to separate the performance of a foreign subsidiary from that of its managers, and there is no need for it.
Required
•    Critically evaluate the preceding statement

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