nufacturing firm ("The nestic operations in th- 000 shares outstanding
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
255
Transcribed Image Text:3. The Consolidated Results of "The Firm"
Problems 3 a-e are based on a U.S.-based multinational manufacturing firm ("The Firm") with wholly owned
subsidiaries in Brazil, Germany, and China, in addition to domestic operations in the United States. The Firm's
shares are traded on the NADSAQ. The Firm currently has 650,000 shares outstanding. The basic operating char-
acteristics of the various business units are as follows:
The Firms' Consolidated Results
US Parent
Brazilian
German
Chinese
Subsidiary
Subsidiary
Subsidiary
Business Performance (in thousands)
Company
(US$)
(reais, R$)
(euros, €)
(yuan, Y)
Earnings before taxes, EBT
(local currency)
4 500
6 250
4 500
2 500
Corporate income tax rate
35 %
25 %
40 %
30 %
Average exchange rate
for the period
1,8000
0,7018
7500ה
Y/US$
R$/US$
€/US$
The Firm must pay corporate income tax in each country in which it currently has operations.
a) After deducting taxes in each country, what are The Firm's consolidated earnings and consolidated
earnings per share (EPS) in U.S. dollars?
b) What proportion of The Firm's consolidated earnings arise from each individual country?
c) What proportion of The Firm's consolidated earnings arise from outside United States?
d) Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais, and subse-
quently, including an economic recession within the country. The Brazilian reais falls in value from
1.8000 R$/$ to 3.0000 R$/$. How are The Firm's consolidated global earnings affected by the fall in the
value of the Brazilian reais?
e) The U.S. dollar has experienced significant swings in value against most of the world's currencies in re-
cent years. What would be the impact on The Firm's consolidated EPS if all foreign currencies were to
appreciate 20% against the U.S. dollar?
Hint: Calculate the percentage changes by dividing the initial currency value by (1+ the percentage change) to
calculate new currency value.
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