Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materials attributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.

Question

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If the Canadian dollar appreciates (i.e., strengthens), Sarakose's earnings before interest and taxes (EBIT) would decrease because it would have to pay more Canadian dollars for the same amount of goods and services. In other words, the expenses (cost of materials and interest expense) would increase in U.S. dollars due to the stronger Canadian dollar. 
Similarly, the dollar value of Sarakose's cash flows would also decrease because it would receive fewer U.S. dollars for its sales in Canada, while its expenses (e.g., cost of materials, interest payments) would remain in Canadian dollars. This would result in a reduced profit margin for Sarakose.