25. Impact of Exchange Rates on MNC Value. Olmsted Co.

has small computer chips

assembled in
Poland and transports the final assembled products to the parent, where they are sold by the
parent in the U.S. The assembled products are invoiced in dollars. It uses Polish currency (the
zloty) to produce these chips, and assembles them in Poland. The Polish subsidiary pays the
employees in the local currency (zloty). Olmsted Co. finances its subsidiary operations with
loans from a Polish bank (in zloty). The parent of Olmsted will send sufficient monthly
payments (in dollars) to the subsidiary in order to repay the loan and other expenses incurred
by the subsidiary. If the Polish zloty depreciates against the dollar over time, will that have a
favorable, unfavorable, or neutral effect on the value of Olmsted Co.? Briefly explain.
ANSWER: It will have a favorable effect because Olmsted incurs expenses in the zloty and it
will be able to cover these expenses with fewer dollars if the zloty depreciates. It will also be
able to repay the zloty loan with fewer dollars if the zloty depreciates.