Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Based on these exact figures, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.

Question

​Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost of materials attributable to the purchase of Canadian goods is C$6 million. Its interest expense on Canadian loans is C$4 million. Based on these exact figures, the dollar value of Whitewater's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.

Quizplus · Accepted Answer

If the Canadian dollar appreciates, it will take fewer U.S. dollars to purchase Canadian dollars, thus reducing Whitewater's revenue in U.S. dollars. However, the cost of materials and interest expenses are denominated in Canadian dollars, so they will decrease in U.S. dollar terms. Therefore, the earnings before interest and taxes would increase due to the decreased costs in U.S. dollars. However, the cash flows would decrease as a result of the decreased revenue in U.S. dollars.

​Whitewater Co

Whitewater Co