Assume That Mill Corp $\mu$ _t

Where the Term on the Left-Hand Side

Multiple Choice

Assume that Mill Corp., a U.S.-based MNC, has applied the following regression model to estimate the sensitivity of its cash flows to exchange rate movements: PCF_t = a₀ + a₁e_t + $\mu$ _t

Where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and e_t is the percentage change in the exchange rate of the currency over period t. The regression model estimates a coefficient of a₁ of 2. This indicates that if the foreign currency:

A) appreciates by 1 percent, Mill's cash flows will decline by 2 percent.
B) appreciates by 1 percent, Mill's cash flows will decline by .2 percent.
C) depreciates by 1 percent, Mill's cash flows will increase by 2 percent.
D) depreciates by 1 percent, Mill's cash flows will decline by 2 percent.
E) None of these are correct.