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 the euro depreciates by 20%; what is the new value of the parent's equity in the subsidiary? Please state your answer in NOK as whole millions (e.g. 825)!

Explanation / Answer

Expsure elasticity is 2

So, when Euro depreciates by 20%, the new expected cash flow is = 200 * .8 = NOK 160

Value of the firm = 160/0.10 = NOK 1,600

New Value of perents equity = NOK 1,600 * 0.50 = NOK 800

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