Step 1: Step 2: a) b)

Assume the JPY depreciates by 20% relative to the USD How will this impact the costs of the average Japanese car sold in the US? How much (in %) is the Japanese content of the average Japanese car? How much (in %) do total USD costs drop if the Japanese content costs 20% less?

-20%

20%

40%

-4% Step 3: How much (in %) of this cost reduction would Japanese car makers pass on to US customers, through added incentives or added sticker prices? Effectively, Japanese car makers would reduce the sales price of their cars by how much (in %)? -0.6% Step 4: What is the additional sales volume Japanese car makers will capture due to this price reduction?

-8%

15%

45%

-1.8%

a)

What is the direct sales elasticity? Sales Elastiticy is the ratio of %-change in volume over %-change in price

(2.00)

b) c)

What is the % change in volume given Step 3 and Step 4 a)? What would this mean in terms of units (ie cars)? How many more cars would Japanese car makers sell due to the 20% JPY depreciation? (in number of cars) How many fewer cars would GM sell? (in number of cars) What is the impact on GM's profit / cash flow? What is GM's average margin (in USD) per cars? One way to estimate the average margin per car is to look at Exh. 6 and to realize that GM's incentives are (see page 4) about 1/3 of the total margin per car.

1.2%

3.6%

49200 -49200

147600 -147600

Step 5: Step 6: a)

3,938.00

b)

How much lower is the total margin (in USD) for GM it it loses market share to its Japanese competitors? $ (193,749,600) $ (581,248,800)

Step 7:

What would be the impact of GM's market value (in USD) if the loss under 6 a) persisited forever? $ Simply use the standard formula to value a perpetual cash flow. Use the discount rate suggested in the case. (968,748,000) $ (2,906,244,000)

Step 8

If GM's market value is USD 23 billion, how much value (in % of market value) is lost due to a 20% depreciation of the JPY? Market Value $ 23,000,000,000

-4.2119%

-12.6358%