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Problem 1.

1 Comparing Cheap Dates Around the World


Comparison of prices or costs across different country and currency environments requires the translation of the local currency into a
single common currency. This is most meaningful when the comparison is for the identical or near-identical product or service
across countries. Deutsche Bank has recently started publishing a comparison of cheap dates -- and evening on the town for two to
eat at McDonald's, see a movie, and drink a beer. Once all costs are converted to a common currency, the U.S. dollar in this case, the
cost of the date can be compared across cities relative to the base case of a cheap date in USD in New York City.
After completing the table below, answer the following questions.
a. Which city in the table is truly the cheapest date?
b. Which city in the table is the most expensive-cheap date?
c. If the exchange rate in Moscow on the Russian ruble (RUB) was 0.04200, instead of 0.0283, what would be the USD price?
d. If the exchange rate in Shangahi was CNY 6.66 = 1 USD, what would be its cost in USD and relative to a cheap date in New York City?

Country
Australia
Brazil
Canada
China
France
Germany
Hong Kong
India
Indonesia
Japan
Malaysia
Mexico
New Zealand
Phillipines
Russia
Singapore
South Africa
United Kingdom
United States
United States

City
Sydney
Rio de Janeiro
Ottawa
Shanghai
Paris
Berlin
Hong Kong
Mumbai
Jakarta
Tokyo
Kuala Lumpur
Mexico City
Auckland
Manila
Moscow
Singapore
Cape Town
London
New York City
San Francisco

Cheap Date in
Local Currency
AUD 111.96
BRL 135.43
CAD 78.33
CNY 373.87
EUR 75.57
EUR 76.49
HKD 467.03
INR 1,379.64
IDR 314,700
JPY 10,269.07
MYR 117.85
MXN 423.93
NZD 111.52
PHP 1,182.88
RUB 2,451.24
SGD 77.89
ZAR 388.58
GBP 73.29
USD 93.20
USD 88.72

Exchange
Rate Quote
USD = 1 AUD
USD = 1 BRL
USD = 1 CAD
USD = 1 CNY
USD = 1 EUR
USD = 1 EUR
USD = 1 HKD
USD = 1 INR
USD = 1 IDR
USD = 1 JPY
USD = 1 MYR
USD = 1 MXN
USD = 1 NZD
USD = 1 PHP
USD = 1 RUB
USD = 1 SGD
USD = 1 ZAR
USD = 1 GBP
1 USD
1 USD

Exchange Rate
7 April 2014
0.9290
0.4363
0.9106
0.1619
1.3702
1.3702
0.1289
0.0167
0.0001
0.0097
0.3048
0.0769
0.8595
0.0222
0.0283
0.7939
0.0946
1.6566
1.0000
1.0000

Cheap Date in
In USD
104.01
59.09
71.33
60.53
103.55
104.81
60.20
23.04
31.47
99.61
35.92
32.60
95.85
26.26
69.37
61.84
36.76
121.41
93.20
88.72

Relative
to NYC
112%
63%
77%
65%
111%
112%
65%
25%
34%
107%
39%
35%
103%
28%
74%
66%
39%
130%
100%
95%

Source: Data drawn from The Random Walk, Mapping the World's Prices 2014, Deutsche Bank Research, 09 May 2014, Figures 30 and 32, with
author calculations. 'Relative to NYC' is calculated as = Cheap Date in USD/93.20.
Note: The cheap date combines the local currency cost of a cab ride for two, two McDonald's hamburgers, two soft drinks, two movie tickets, and
two beers. In 2013 Deutsche Bank had included sending a bouquet of roses in the date, but did not include that in the 2014 index, making the two
years not directly comparable.
a. The truly cheapest cheap date could be had in Mumbai, India, at only 25% of what it costs in New York City.
b. The most expensive-cheap date would be London at 130% of the cost of New York City.
c. If the Russian ruble was actually trading at 0.042 instead of 0.0283, Moscow would be 110% of the cost of a cheap date in New York City.
d. If the exchange rate in Shangahi was CNY 6.66 = 1 USD, a cheap date would cost USD 56.14, only 60% of the cost in New York City.

Problem 1.2 Blundell Biotech


Blundell Biotech is a U.S.-based biotechnology company with operations and earnings in a number of foreign countries. The
company's profits by subsidiary, in local currency (in millions), are shown in the following table for 2013 and 2014.

Net Income
2013
2014

Japanese
Subsidiary
JPY 1,500
JPY 1,460

Britih
Subsidiary
GBP 100.00
GBP 106.40

European
Subsidiary
EUR 204.00
EUR 208.00

Chinese
Subsidiary
CNY 168.00
CNY 194.00

Russian
Subsidiary
RUB 124.00
RUB 116.00

United States
Subsidiary
USD 360.00
USD 382.00

The average exchange rate for each year, by currency pairs, was the following. Use this data to answer the following questions.
Exchange Rate
2013
2014

JPY = 1 USD
97.57
105.88

USD = 1 GBP
1.5646
1.6473

USD = 1 EUR
1.3286
1.3288

CNY = 1 USD
6.1484
6.1612

RUB = 1 USD
31.86
38.62

USD
1.0000
1.0000

a. What was Blundell Biotech's consolidated profits in U.S. dollars in 2013 and 2014?
b. If the same exchange rates were used for both years, what was the change in corporate earnings on a "constant currency" basis?
c. Using the results of the 'constant currency analysis in part b, is it possible to separate Blundell's growth in earnings between
local currency earnings and foreign exchange rate impacts on a consolidated basis?
a. Consolidated profits or earnings is found by consolidating the converted profits in each foreign currency to U.S. dollars for that period. (This
is simplified. Actual accounting practices would require the additional netting of any intra-company transactions resulting to eliminate any
double-counting of profits.)

Net Income (USD)


2013
2014

Japanese
Subsidiary
USD 15.37
USD 13.79

Britih
Subsidiary
USD 156.46
USD 175.27

European
Subsidiary
USD 271.03
USD 276.39

Chinese
Subsidiary
USD 27.32
USD 31.49

Russian
Subsidiary
USD 3.89
USD 3.00

United States
Subsidiary
USD 360.00
USD 382.00

Consolidated
Earnings
USD 834.08
USD 881.94
5.74%

b. If the exchange rates for 2013 are used for both years, earnings from individual subsidiaries and consolidation appear as follows.

Net Income (USD)


2013
2014
Change
Percent change

Japanese
Subsidiary
USD 15.37
USD 14.96
(USD 0.41)
-2.7%

Britih
Subsidiary
USD 156.46
USD 166.47
USD 10.01
6.4%

European
Subsidiary
USD 271.03
USD 276.35
USD 5.31
2.0%

Chinese
Subsidiary
USD 27.32
USD 31.55
USD 4.23
15.5%

Russian
Subsidiary
USD 3.89
USD 3.64
(USD 0.25)
-6.5%

United States
Subsidiary
USD 360.00
USD 382.00
USD 22.00
6.1%

Consolidated
Earnings
USD 834.08
USD 874.98
USD 40.90
4.90%

On a constant currency basis, all subsidiaries showed growth in profits except for the Japanese and Russian subsidiaries. Fortunately for
Blundell, neither of those subsidiaries is a major contributor to total profits.
c. Blundell Biotech's consolidated earnings grew 5.7%. Since 4.9% of that was on an actual results basis (using constant currency assumption),
the exchange rate-based change in earnings can be solved for:
Total percent change = (1 + Actual percent change) x (1 + Foreign exchange percent change) -1
When rearranged to solve for the FX percent change:
FX percent change = (1.0574)/(1.0490) - 1

0.80%

Comparative Advantage

Problems 1-5 illustrate an example of trade induced by comparative advantage. They assume that China and France
each have 1,000 production units. With one unit of production (a mix of land, labor, capital, and technology), China
can produce either 10 containers of toys or 7 cases of wine. France can produce either 2 cases of toys or 7 cases of
wine. Thus, a production unit in China is five times as efficient compared to France when producing toys, but
equally efficient when producing wine. Assume at first that no trade takes place. China allocates 800 production
units to building toys and 200 production units to producing wine. France allocates 200 production units to building
toys and 800 production units to producing wine.

Problem 1.3 Production and Consumption


What is the production and consumption of China and France without trade?
Toys
(containers/unit)
10
2
1,000
1,000

Wine
(cases/unit)
7
7

Toys

Wine

CHINA
Allocated production units to
Produces and consumes (output per unit x units allocated)

800
8,000

200
1,400

FRANCE
Allocated production units to
Produces and consumes (output per unit x units allocated)

200
400

800
5,600

8,400

7,000

Assumptions
China -- output per unit of production input
France -- output per unit of production input
China -- total production inputs
France -- total production inputs

Production if there is no trade

Total production and consumption across both countries

Problem 1.4 Specialization


Assume complete specialization, where China produces only toys and France produces only wine. What would be
the effect on total production?

Assumptions
China -- output per unit of production input
France -- output per unit of production input
China -- total production inputs
France -- total production inputs

Production if there is complete specialization


CHINA
Allocated production units to
Produces and consumes (output per unit x units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit x units allocated)
Total production and consumption across both countries

Toys
(containers/unit)
10
2
1,000
1,000

Wine
(cases/unit)
7
7

Toys

Wine

1,000
10,000

10,000

1,000
7,000
7,000

The combined production of both countries is 10,000 containers of toys, 1,600 more containers of toys than before
specialization, with wine production remaining unchanged.

Problem 1.5 Trade at China's Domestic Price


Chinas domestic price is 10 containers of toys equals 7 cases of wine. Assume China produces 10,000 containers of toys and exports 2,000 to France. Assume France produces
7,000 cases of wine and exports 1,400 cases to China. What happens to total production and consumption?

Assumptions
China -- output per unit of production input
France -- output per unit of production input
China -- total production inputs
France -- total production inputs

Trade at China's domestic price (10 toys = 7 wine)


CHINA
Allocated production units to
Produces and consumes (output per unit x units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit x units allocated)
Total production and consumption across both countries

Toys
(containers/unit)
10
2
1,000
1,000

Wine
(cases/unit)
7
7

Toy
Production

TOYS
Exports (-)/
Imports (+)

Domestic
Consumption

1,000
10,000

(2,000)

8,000

2,000

2,000

1,000
7,000

10,000

7,000

10,000

Wine
Production

WINE
Exports (-)/
Imports (+)

Domestic
Consumption

1,400

1,400

(1,400)

5,600

7,000

With complete specialization, toy production in total is increased as in Problem 2.


Toy production and consumption in France increases from 400 containers of toys before trade to 2000 containers after trade, a gain in consumption of 1600 containers.
Wine production and consumption remains the same as before trade. China is now consuming 8,000 containers of toys and 1,400 cases of wine, the same levels of both as prior to trade. Hence all of
the benefits of trade have gone to France.

Problem 1.6 Trade at France's Domestic Price


Frances domestic price is 2 containers of toys equals 7 cases of wine. Assume China produces 10,000 containers of toys and exports 400 containers to France. Assume France in
turn produces 7,000 cases of wine and exports 1,400 cases to China. What happens to total production and consumption?

Assumptions
China -- output per unit of production input
France -- output per unit of production input
China -- total production inputs
France -- total production inputs

Trade at France's domestic price (2 toys = 7 wine)


CHINA
Allocated production units to
Produces and consumes (output per unit x units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit x units allocated)
Total production and consumption across both countries

Toys
(containers/unit)
10
2
1,000
1,000

Wine
(cases/unit)
7
7

Toy
Production

TOYS
Exports (-)/
Imports (+)

Domestic
Consumption

1,000
10,000

(400)

9,600

400

400

1,000
7,000

10,000

7,000

10,000

Wine
Production

WINE
Exports (-)/
Imports (+)

Domestic
Consumption

1,400

1,400

(1,400)

5,600
7,000

Toy production and consumption in China increases from 8,000 containers of toys before trade to 9,600 containers -- 1,600 more containers -- after trade. Wine production and consumption remains
the same as before trade. Thus the full benefit of trade goes to China when trading at France's domestic prices.

Problem 1.7 Trade at Negotiated Mid-Price


The mid-price for exchange between France and China can be calculated as follows:

Assumptions
China -- output per unit of production input
France -- output per unit of production input
China -- total production inputs
France -- total production inputs

Toys
(containers/unit)
10
2
1,000
1,000

Wine
(cases/unit)
7
7

What happens to total production and consumption?

Trade at Negotiated Mid-Price (6 toys = 7 wine)


CHINA
Allocated production units to
Produces and consumes (output per unit x units allocated)
FRANCE
Allocated production units to
Produces and consumes (output per unit x units allocated)
Total production and consumption across both countries

Toy
Production

TOYS
Exports (-)/
Imports (+)

Domestic
Consumption

1,000
10,000

(1,200)

8,800

1,200

1,200

1,000
7,000

10,000

7,000

10,000

Wine
Production

China gains 800 more containers of toys (8,800 post-trade compared to 8,000 pre-trade), and enjoys the same level of wine consumption (1,400).
France gains 800 more containers of toys (1,200 post-trade compared to 400 pre-trade), and enjoys the same level of wine consumption (5,600).
Wine production therefore remains the same as before trade, but now the 1,600 increased production of toys is split evenly between the two countries.

WINE
Exports (-)/
Imports (+)

Domestic
Consumption

1,400

1,400

(1,400)

5,600
7,000

Problem 1.8 Peng Plasma Pricing


Peng Plasma is a privately held Chinese business. It specializes in the manufacture of plasma cutting torches. Over the past eight
years it has held the Chinese renminbi price of the PT350 cutting torch fixed at Rmb 18,000 per unit. Over that same period it
has worked to reduce costs per unit, but has struggled of late due to higher input costs. Over that same period the renminbi has
continued to be revalued against the U.S. dollar by the Chinese government. After completing the table assuming the same
price in renminbi for all years answer the following questions.
a. What has been the impact of Peng's pricing strategy on the US$ price? How would you expect their U.S. dollar-based
customers to have reacted to this?
b. What has been the impact on Peng's margins from this pricing strategy?
Fixed Rmb Pricing of the PT350 Plasma Cutting Torch

Year
2007
2008
2009
2010
2011
2012
2013
2014
Cumulative

Cost
(Rmb)
16,000
15,400
14,800
14,700
14,200
14,400
14,600
14,800

Margin
(Rmb)
2,000
2,600
3,200
3,300
3,800
3,600
3,400
3,200

Price
(Rmb)
18,000
18,000
18,000
18,000
18,000
18,000
18,000
18,000

Margin Average Rate


(percent)
(Rmb/US$)
11.1%
7.61
14.4%
6.95
17.8%
6.83
18.3%
6.77
21.1%
6.46
20.0%
6.31
18.9%
6.15
17.8%
6.16

Price
(US$)
2,365
2,590
2,635
2,659
2,786
2,853
2,927
2,922

Percent Chg
in US$ Price
--9.50%
1.76%
0.89%
4.80%
2.38%
2.60%
-0.16%
23.54%

Margin Average Rate


(percent)
(Rmb/US$)
11.1%
7.61
6.95
6.83
6.77
6.46
6.31
6.15
6.16

Price
(US$)
2,365

Percent Chg
in US$ Price
---

Fixed Rmb Pricing of the PT350 Plasma Cutting Torch

Year
2007
2008
2009
2010
2011
2012
2013
2014
Cumulative

Cost
(Rmb)
16,000
15,400
14,800
14,700
14,200
14,400
14,600
14,800

Margin
(Rmb)
2,000

Price
(Rmb)
18,000

Problem 1.9 Santiago Pirolta's Compensation Agreement


Santiago Pirolta has accepted the Managing Director position for Vitro de Mexico's U.S. operations. Vitro is a
Mexico-based manufacturer of flat and custom glass products. Much of its U.S. sales are based on a variety of bottle
products, both mass market (e.g., glass bottles for soft drinks and beer) as well as specialty products (high-end
cosmetic bottles with rare metal coloring and quality). He will live and work in the United States (Dallas, Texas) and
wishes to be paid in US dollars. Vitro has agreed that his base salary of USD350,000 will be paid in U.S. dollars, but
Vitro wishes to tie his annual performance bonus to the Mexican peso value of U.S. sales since Vitro consolidates all
final results for reporting to stockholders in Mexican pesos (MXN).
Santiago, however, is a bit uncertain on having his bonus based on the Mexican peso values of U.S. sales. As a
close friend and colleague, what advice would you give him based on your completion of the table below?

Year
2011
2012
2013
2014

Vitro's U.S. Sales


(millions of USD)
USD 820
USD 842
USD 845
USD 860

Percent
Change
2.7%
0.4%
1.8%

Annual Avg Rate


MXN = 1 USD
MXN 12.80
MXN 13.30
MXN 12.70
MXN 13.40

Vitro's U.S. Sales


(millions of MXN)
MXN 10,496
MXN 11,199
MXN 10,732
MXN 11,524

Percent
Change
6.7%
-4.2%
7.4%

Based on Vitro's U.S. sales, in both U.S. dollars and Mexican pesos, you should recommend that Santiago continue to
argue for his performance bonus to be based on the U.S. dollar value, not the translated Mexican peso value.
First, under the previous Managing Director, U.S. sales measured both ways was volatile. The volatility, however,
was larger in pesos than dollars. If that was the only concern, then it would only be up to Santiago to choose his 'risk
tolerance' -- how much volatility he is willing to bear in his annual performance bonus.
But more importantly, if his performance was based on the USD value of U.S. sales, he would be measured on the
actual sales which he had direct control over. Santiago does not, and willl not, control the exchange rate between the
dollar and the peso. And changes in that exchange rate could potentially destroy all growth in U.S. sales (and his
bonus) as it did in 2013. In 2013 U.S. sales grew (not much, but they grew), and he would have theoretically recieved
a bonus. But as measured in Mexican pesos in 2013, as a result of a fall in the value of the peso, his performance
would have not been positive -- and probably so would be the value of his bonus.

Americo Industries - 2010


Problems 6 through 10 are based on Americo Industries. Americo is a U.S.-based multinational manufacturing firm, with wholly owned subsidiaries in
Brazil, Germany, and China, in addition to domestic operations in the United States. Americo is traded on the NADSAQ. Americo currently has 650,000
shares outstanding. The basic operating characteristics of the various business units is as follows:

U.S. Parent
Company
(US$)
$4,500
35%
------

Business Performance (000s, loccal currency)


Earnings before taxes (EBT)
Corporate income tax rate
Average exchange rate for the period

Brazilian
Subsidiary
(reais, R$)
R$6,250
25%
R$1.80/$

German
Subsidiary
(euros, )
4,500
40%
0.7018/$

Chinese
Subsidiary
(yuan, Y)
Y2,500
30%
Y7.750/$

Problem 1.10 Americo Industries' Consolidate Earnings


Americo must pay corporate income tax in each country in which it currently has operations.
a. After deducting taxes in each country, what are Americo's consolidated earnings and consolidated earnings per share in U.S. dollars?
b. What proportion of Americo's consolidated earnings arise from each individual country?
c. What proportion of Americo's consolidated earnings arise from outside the United States?
U.S. Parent
Company
(US$)

Business Performance (000s)


Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary

4,500.00
(1,575.00)
2,925.00

35%

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

-----$ 2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

$ 9,602.22
650.00

a. Consolidated earnings per share (EPS)

Brazilian
Subsidiary
(reais, R$)

25%

6,250.00
(1,562.50)
4,687.50

German
Subsidiary
(euros, )

40%

4,500.00
(1,800.00)
2,700.00

1.8000
$ 2,604.17

0.7018
$ 3,847.25

27.1%

40.1%

Chinese
Subsidiary
(yuan, Y)
2,500.00
(750.00)
1,750.00

30%

7.7500
225.81

14.77

b. Proportion of total profits originating


by country

30.5%

c. Proportion of total profits originating


from outside the United States

69.5%

2.4%

Problem 1.11 Americo's EPS Sensitivity to Exchange Rates (A)


Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais and, subsequently, inducing an economic recession within the
country. What would be the impact on Americo's consolidated EPS if the Brazilian reais were to fall in value to R$3.00/$, with all other earnings and exchange
rates remaining the same?
U.S. Parent
Company
(US$)

Business Performance (000s)


Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary

4,500.00
(1,575.00)
2,925.00

35%

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

Brazilian
Subsidiary
(reais, R$)

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

9,602.22
650.00

Baseline earnings per share (EPS)

14.77

6,250.00
(1,562.50)
4,687.50

25%

German
Subsidiary
(euros, )
4,500.00
(1,800.00)
2,700.00

40%

1.8000
2,604.17

Chinese
Subsidiary
(yuan, Y)
2,500.00
(750.00)
1,750.00

30%

0.7018
3,847.25

7.7500
225.81

Brazilian reais falls in value against the U.S. dollar


U.S. Parent
Company
(US$)

Business Performance (000s)


Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary
Avg exchange rate for the period (fc/$)
Net profits of individual subsidiary (US$)

4,500.00
(1,575.00)
2,925.00

35%

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

8,560.56
650.00

"New" earnings per share (EPS)

13.17

EPS change from baseline:

-10.8%

Brazilian
Subsidiary
(reais, R$)
6,250.00
(1,562.50)
4,687.50

25%

3.0000
1,562.50

German
Subsidiary
(euros, )
4,500.00
(1,800.00)
2,700.00

40%

0.7018
3,847.25

Chinese
Subsidiary
(yuan, Y)
2,500.00
(750.00)
1,750.00

30%

7.7500
225.81

Problem 1.12 Americo's EPS Sensitivity to Exchange Rates (B)


Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais and, subsequently, inducing an economic recession within the
country. What would be the impact on Americo's consolidated EPS if, in addition to the fall in the value of the reais to R$3.00/$, earnings before taxes in Brazil
fell as a result of the recession to R$5,8000,000?

Business Performance (000s)


Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary

35%

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

U.S. Parent
Company
(US$)

Brazilian
Subsidiary
(reais, R$)

German
Subsidiary
(euros, )

Chinese
Subsidiary
(yuan, Y)

4,500.00
(1,575.00)
2,925.00

6,250.00
(1,562.50)
4,687.50

4,500.00
(1,800.00)
2,700.00

2,500.00
(750.00)
1,750.00

25%

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

9,602.22
650.00

Baseline earnings per share (EPS)

14.77

40%

1.8000
2,604.17

30%

0.7018
3,847.25

7.7500
225.81

Brazilian reais falls in value against the U.S. dollar and Americo's Brazilian sales decline
U.S. Parent
Company
(US$)

Business Performance (000s)


Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary
Avg exchange rate for the period (fc/$)
Net profits of individual subsidiary (US$)

4,500.00
(1,575.00)
2,925.00

35%

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

8,448.06
650.00

Revised earnings per share (EPS)

13.00

Change in EPS from both changes:

-12.0%

Brazilian
Subsidiary
(reais, R$)
5,800.00
(1,450.00)
4,350.00

25%

3.0000
1,450.00

German
Subsidiary
(euros, )
4,500.00
(1,800.00)
2,700.00

40%

0.7018
3,847.25

Chinese
Subsidiary
(yuan, Y)
2,500.00
(750.00)
1,750.00

30%

7.7500
225.81

Problem 1.13 Americo's Earnings and the Fall of the Dollar


The U.S. dollar has experienced significant swings in value against most of the world's currencies in recent years.
a. What would be the impact on Americos consolidated EPS if all foreign currencies were to appreciate 20% against the U.S. dollar?
b. What would be the impact on Americos consolidated EPS if all foreign currencies were to depreciate 20% against the U.S. dollar?
Baseline exchange rate (fc/$)
Percent change (+ appreciation, - depreciation)
New exchange rate (fc/$)
Appreciation Case
Business Performance (000s)
Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary

1.8000
20%
1.5000

0.7018
20%
0.5848

7.7500
20%
6.4583

U.S. Parent
Company
(US$)

Brazilian
Subsidiary
(reais, R$)

German
Subsidiary
(euros, )

Chinese
Subsidiary
(yuan, Y)

4,500.00
(1,575.00)
2,925.00

35%

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

-----

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

10,937.67
650.00

Baseline earnings per share (EPS)

14.77

EPS if foreign currencies appreciate

16.83

Baseline exchange rate (fc/$)


Percent change (+ appreciation, - depreciation)
New exchange rate (fc/$)
Depreciation Case
Business Performance (000s)
Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary
Avg exchange rate for the period (fc/$)
Net profits of individual subsidiary (US$)

4,500.00
(1,800.00)
2,700.00

40%

1.5000
3,125.00

EPS has changed by:

2,500.00
(750.00)
1,750.00

30%

0.5848
4,616.70

6.4583
270.97

13.9%

-----

1.8000
-20%
2.2500

0.7018
-20%
0.8773

7.7500
-20%
9.6875

U.S. Parent
Company
(US$)

Brazilian
Subsidiary
(reais, R$)

German
Subsidiary
(euros, )

Chinese
Subsidiary
(yuan, Y)

4,500.00
(1,575.00)
2,925.00

35%

6,250.00
(1,562.50)
4,687.50

25%

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

8,266.78
650.00

Baseline earnings per share (EPS)

14.77

EPS if foreign currencies depreciate

12.72

6,250.00
(1,562.50)
4,687.50

25%

2.2500
2,083.33

EPS has changed by:

4,500.00
(1,800.00)
2,700.00

40%

0.8773
3,077.80

-13.9%

2,500.00
(750.00)
1,750.00

30%

9.6875
180.65

Problem 1.14 Americo's Earnings and Global Taxation


All MNEs attempt to minimize their global tax liabilities. Return to the original set of baseline assumptions and answer the following questions regarding
Americos global tax liabilities:
a. What is the total amount in U.S. dollars which Americo is paying across its global business in corporate income taxes?
b. What is Americo's effective tax rate (total taxes paid as a proportion of pre-tax profit)?
c. What would be the impact on Americos EPS and global effective tax rate if Germany instituted a corporate tax reduction to 28%, and Americos earnings
before tax in Germany rose to 5,000,000?
U.S. Parent
Company
(US$)

Business Performance (000s)


Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary

4,500.00
(1,575.00)
2,925.00

35%

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

Brazilian
Subsidiary
(reais, R$)

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

9,602.22
650.00

Consoldiated earnings per share (EPS)

14.77

Tax payments by country in US dollars

1,575.00

a. Total global tax bill, US$

5,104.66

6,250.00
(1,562.50)
4,687.50

25%

German
Subsidiary
(euros, )
4,500.00
(1,800.00)
2,700.00

40%

Chinese
Subsidiary
(yuan, Y)
2,500.00
(750.00)
1,750.00

30%

1.8000
2,604.17

0.7018
3,847.25

7.7500
225.81

868.06

2,564.83

96.77

3,472.22

6,412.08

322.58

b. What is Americo's effective tax rate?


EBT by country, US$

4,500.00

Consolidated EBT
Total tax bill
Effective tax rate

$
$

14,706.89
5,104.66
34.7%

c. What would be the impact on Americo's EPS and global effective tax rate if Germany instituted a tax cut to 28% and German subsidiary earnings
rose to 5 million euros?
U.S. Parent
Brazilian
German
Chinese
Company
Subsidiary
Subsidiary
Subsidiary
Business Performance (000s)
(US$)
(reais, R$)
(euros, )
(yuan, Y)
Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary
Avg exchange rate for the period (fc/$)
Net profits of individual subsidiary (US$)

4,500.00
(1,575.00)
2,925.00

35%

-----2,925.00

6,250.00
(1,562.50)
4,687.50

25%

5,000.00
(1,400.00)
3,600.00

28%

2,500.00
(750.00)
1,750.00

30%

1.8000
2,604.17

0.7018
5,129.67

7.7500
225.81

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

10,884.64
650.00

Consoldiated earnings per share (EPS)

16.75

4,500.00

3,472.22

7,124.54

322.58

1,575.00

868.06

1,994.87

96.77

$
$

15,419.34
4,534.70
29.4%

EBT by country, US$


Tax payments by country in US dollars
Consolidated EBT
Total tax bill
Effective tax rate