Question Details

Would Alaska- cash flows be favorably or unfavorably affected 



1. Assessing Economic Exposure. Alaska Inc. plans to create and finance a subsidiary in Mexico
that produces computer components at a low cost and exports them to other countries. It has no
other international business. The subsidiary will produce computers and export them to Caribbean
islands and will invoice the products in U.S. dollars. The values of the currencies in the islands are
expected to remain very stable against the dollar. The subsidiary will pay wages, rent, and other
operating costs in Mexican pesos. The subsidiary will remit earnings monthly to the parent.
a. Would Alaska- cash flows be favorably or unfavorably affected if the Mexican peso
depreciates over time?
b. Assume that Alaska considers partial financing of this subsidiary with peso loans from
Mexican banks instead of providing all the financing with its own funds. Would this
alternative form of financing increase, decrease, or have no effect on the degree to which
Alaska is exposed to exchange rate movements of the peso?



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