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CHAPTER 31
EAST COAST YACHTS GOES
INTERNATIONAL
2. If the dollar strengthens, the profit will decline. Conversely, if the dollar weakens, the profit
3. The company will pay the sales commission out of gross sales, so the after-commission sales
in euros is:
At the current exchange rate of $1.34/€, the EBT in euros will be converted to dollars in the
amount of:
And the production costs are:
Production costs = $10,720,000(.80)
Production costs = $8,576,000
So, the profit at the current exchange rate is:
If the exchange rate changes to $1.25/€, the euros will convert to:
Since the production costs are fixed, the profit at this exchange rate will be:
C-2 CASE SOLUTIONS
The breakeven exchange rate is the exchange rate that will allow the after-commission costs
in euros to convert to a dollar amount that covers the production costs, so:
4. The company could use options, futures, or forwards. The downside to all three hedging
5. At the current exchange rate, the company will make a profit unless the exchange rate moves
