The subsidiaries of Forest Company produce goods in the U.S., Germany, and Australia, and sells the goods in the areas where they are produced. Foreign earnings are periodically remitted to the U.S. parent. As the euro’s interest rates have declined to a very low level, Forest Company has decided to finance its German operations with borrowed funds in place of the parent’s equity investment. Forest will transfer its equity investment in the German subsidiary over to its Australian subsidiary. These funds will be used to pay off a floating rate loan, as Australian interest rates have been high and are rising. Explain the expected effects of these actions on the consolidated and of Forest Company.
Given the strategy to be used by Forest, explain how its exposure to risk may have changed.
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