Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value?
A) A weaker Mexican economy
B) Lower Mexican interest rates
C) Depreciation of the Mexican peso
D) Appreciation of the Mexican peso.

Question

Quizplus · Accepted Answer

The decline in the valuation of Saller Co. despite no change in expected cash flows suggests that the decline in value may be due to currency fluctuations. If the Mexican peso has depreciated against the currency that Saller Co. uses to report its financials (e.g. US Dollars), then the value of the cash flows from the subsidiary would be worth less in the parent company's home currency, leading to a decline in overall valuation.

Saller Co Has a Subsidiary in Mexico