Next year\'s expected operating cash flow of a Norwegian-owned subsidiary in Fra

Question

Next year's expected operating cash flow of a Norwegian-owned subsidiary in France is NOK 200 million. The exposure-elasticity of the operating cash flow is 2.00. The exchange rate is NOK 8.00/EUR and the subsidiary's cost of capital is 10%.

The subsidiary is 50% debt-financed. The debt, as well as the equity, is denominated in the parent company's currency (NOK).

If instead all debt is denominated in the local (subsidiary's) currency; what is the elasticity exposure coefficient of equity? Please submit your answer rounded to two decimal points (e.g. 2.25).

Explanation / Answer

Amount in subsidaries currency = 200 / 8 = 25 million euros

Exposure elasticity = 0.25

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