Question

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Company X is a U.S.-based IT company with operations and earnings in a number of foreign...

Company X is a U.S.-based IT 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 2019 and 2020.

     Net Income           Japanese Subsidiary       Britih Subsidiary

2019                   JPY 200                            GBP 100.00

2020                   JPY 1,480                         GBP 108.40

The average exchange rate for each year, by currency pairs, is the following.

Exchange Rate      JPY = 1 USD                 USD = 1 GBP

      2019                     97.57                               1.5646

      2020                      90.88                               1.6473

Use the above data, Students answer the following questions.

  1. What is Company X's consolidated profits in U.S. dollars in 2019 and 2020?

  

  1. If the same exchange rates are used for both years, what is the change in corporate earnings on a "constant currency" basis?   

Using the results of the constant currency analysis in part b, is it possible to separate Company X's growth in earnings between local currency earnings and foreign exchange rate impacts on a consolidated basis?           

Solutions

Expert Solution

A. Net profit from Japenese subsidiary:

2019--200*(1/97.57)= 2.05 USD

2020--1480*(1/90.88)=16.29 USD.

Total from Japanese Subsidiary = 18.34 USD

Net profit from British Subsidiary

2019-- 100*1.5646= 156.46USD

2020--108.4*1.6473= 178.56 USD

Total form British Subsidiary= 335.02 USD

Consolidated net profit :

2019--2.05+156.46=158.51 USD

2020--16.29+178.56=194.85 USD

B. If we consider a constant currency basis, the currency rate in 2019 will be the same in 2020

Net profit from Japenese subsidiary:

2019--200*(1/97.57)= 2.05 USD

2020--1480*(1/97.57)=15.17 USD.

Total from Japanese Subsidiary = 17.22 USD

Net profit from British Subsidiary

2019-- 100*1.5646= 156.46USD

2020--108.4*1.5646= 169.6 USD

Total form British Subsidiary= 326.06 USD

Consolidated:

2019-- 2.05+156.46=158.51 USD

2020--15.17+169.6= 184.77USD

Difference due to constant currency:

2020--- 194.85-184.77=10.08 USD

Thus due to constant currency the company can incur a loss of 10.08 USD.

jeff jeffy answered 1 year ago
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