Question

Assume that you are a Financial Manager of Starbucks Coffee, Inc., a multi-national corporation. You are in charge of determining the impact of exchange rate changes on the firm. Changes in currency exchange affect both the balance sheet and the income statement. The balance sheet impact occurs when the value of international assets are translated to U.S. dollars. The values of those assets change as the exchange rate changes. The value of costs, revenue, and profit also are impacted on the income statement because of exchange rate risk. Consider that Starbucks has the following investments in coffee bean production and processing:

Table One:

Country	Value (in millions of U.S. dollars)
Columbia	$75
Kenya	$100
Papua New Guinea	$80

            The expense of all the labor, production, and beans will require the following foreign currency amounts during the current year:

                        Table Two:

Country	Cash Flow (in millions)
Columbia	78,180 pesos
Kenya	3,200 shilling
Papua New Guinea	100 kina

            Starbucks Coffee has also invested in store facilities to sell coffee products. The countries and the value of the investments are as follows:

                        Table Three:

Country	Value (in millions of U.S. dollars)
Canada	$200
Japan	$100
United Kingdom	$150

            The “Net Profit” from these countries during the current year is as follows:

                        Table Four:

Country	Cash Flow (in millions)
Canada	80 Canadian dollars
Japan	7,200 Japanese yen
United Kingdom	30 British pounds

            The current spot exchange rates per one U.S. dollar are as follows:

                                    Table Five:

Country	Currency per one U.S. dollar:
Columbia	2,204.50 Columbian pesos
Kenya	69.480 Kenyan shilling
Papua New Guinea	3.0189 Papua New Guinea kina
Canada	1.1690 Canadian dollar
Japan	117.04 Japanese yen
United Kingdom	.5182 British pound

            As the Financial Manager for Starbucks, your task is to determine the following:

3. Some sharing of raw materials occurs between the coffee bean production facilities

            located in Columbia and Kenya. Calculate the currency cross-rate between Columbian

            pesos and Kenyan shilling (i.e., how may Columbian pesos can be purchased with a

single Kenyan shilling?).

Answer 1

Columbian pesos/$ = 2204.5

Kenyan shilling/$ = 69.48

Cross Currency Rate i.e. Columbian Pesos/Kenyan Shilling

= Columbian Pesos/$ × $/Kenyan Shilling

= 2204.5 ÷ Kenyan Shilling/$

= 2204.5 ÷ 69.48

= 31.7286

Therefore, Canadian Pesos/Kenyan Shilling = 31.7286 i.e. 31.7286 Canadian Pesos can be purchased with a single Kenyan Shilling.

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