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. Given these exact figures above, 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

Quizplus · Accepted Answer

If the Canadian dollar appreciates, it means each Canadian dollar is worth more U.S. dollars. As a result, Whitewater's sales revenue of C$8 million would be worth more U.S. dollars, leading to an increase in earnings before interest and taxes. However, on the other side, the cost of materials and interest expense in Canadian dollars would be worth more U.S. dollars, leading to a decrease in cash flows. This means the answer choice D, increase in earnings before interest and taxes and decrease in cash flows, is the best option.