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

Quizplus · Accepted Answer

If the Canadian dollar appreciates, the cost of materials and interest expenses in USD terms will increase, reducing earnings before interest and taxes. The cash flows will also decrease as the net cash outflow in Canadian dollars becomes more expensive in USD terms.