Soenen A/S is a fully owned Norwegian subsidiary of Mehta Montana Co. (MM), a U.S.-based corporation. The budgeted income statement of Soenen A/S for 20x3 follows. Soenen is expected to transfer its net cash flow to MM annually on December 31. Budget variances were immaterial. The exchange rate at the time of budget preparation was Norwegian krone (NKr)7.6 = $1. At the end of the year, the exchange rate was NKr8.0 = $1.
Soenen A/S
Budgeted Income Statement
For the Year ending December 31, 20x3
Sales revenue NKr 24,000,000
Cost of sales (13,200,000)
Gross margin 10,800,000
Operating expenses* (4,400,000)
Income before taxes 6,400,000
Income tax (1,600,000)
Net income NKr 4,800,000
*Indudes NKr940,000 depreciation expense.
Required:
(1) Compute the net cash flow in the Norwegian krone and in the U.S. dollar.
(2) Explain the economic impact of the exchange rate change.
(3) What can Soenen A/S do in the future to manage its risk exposure?