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Assumptions Values
Buy a euro in Johannesburg (ZAR=€1.00) ZAR 16. Which is equivalent, the reciprocal (€=ZAR 1.00) € 0.
Buy a South African rand in Paris (ZAR=€1.00) € 0. Which is equivalent, the reciprocal (€=ZAR 1.00) ZAR 16.
There is a minor difference between the two currency quotes.
Problem 1.1 Mark Du Plessis in Johannesburg, South Africa
Mark Du Plessis lives in Johannesburg, South Africa. He can buy a euro for ZAR16.3700 (South African rand). At the same time, Richard Nolan, living in Paris, can buy a South African rand for €0.0631. What is the foreign exchange
Assumptions Rate Values Spot rate, December 20, 1994 (Ps = $1.00) S1 3. Spot rate, December 21, 1994 (Ps = $1.00) S2 5.
Calculation percentage of devaluation: Percentage change in the peso versus the dollar -40.00%
Percent change = ( S1 - S2 ) ÷ ( S2 )
Problem 1.2 Mexico's Cada Seis Años
The peso since that time, and we have now weathered a number of additional six-year dates (2000, 2006, 2012, 2018), has been remarkable stable against all major currencies, including the
Mexico was famous – or infamous – for many years in having two things every six years ( cada seis años in Spanish): a presidential election and a currency devaluation. This was the case in 1976, 1982, 1988, and in 1994. In its last devaluation on December 20, 1994, the value of the Mexican peso (Ps) was officially changed from Ps3.30 = $1.00 to Ps5.50 = $1.00. What was the percentage devaluation?
Spot rate on the U.S. dollar to euro cross rate USD1.0644=EUR1. Spot rate on the Russian ruble to U.S. dollar cross rate RUB59.468=USD1.
Assumptions Values Beginning your trip with euros 15,000. Spot rate (USD=EUR1.00) 1. Spot rate (RUB=USD1.00) 59.
a) What is the Russian ruble to euro cross rate?
Cross rate (RUB=EUR1.00) 63.
RUB to EUR = RUB=USD1.00 x USD=EUR1.
b) How many Russian rubles will you obtain for your euros?
Converting your euros into Rubles 949,
Problem 1.4 Munich to Moscow
On your post-graduation celebratory trip you decide to travel from Munich, Germany, to Moscow, Russia. You leave Munich with 15,000 euros (EUR) in your wallet. Wanting to exchange all of these for Russian rubles (RUB), you obtain the following quotes:
a. What is the Russian ruble-euro cross rate? b. How many Russian rubles will you obtain for your euros?
Assumptions Value Euro funds for expenses in Japan € 17,000.
Average exchange rate for the month (JPY = 1.00 EUR): January JPY 125. February JPY 126. March JPY 124. April JPY 124. May JPY 121. June JPY 122. July JPY 121. August JPY 117. September 17 in Airport JPY 119.
Answers
Japan proceeds from exchange by month:
EUR x spot exchange rate (JPY = 1.00 EUR)
January JPY 2,128,060. February JPY 2,144,890. March JPY 2,114,460. April JPY 2,124,150. May JPY 2,069,920. June JPY 2,086,070. July JPY 2,059,380. August JPY 1,989,340. September 17 in Airport JPY 2,026,910.
Problem 1.5 Rugby World Cup and the Japanese Yen
Steven McGregor had planned his trip to the Rugby World Cup in Japan for almost a year. He had budgeted and saved €17,000 for expenses while in Japan. But he had postponed exchanging the euros for Japanese yen (JPY) until the very last minute on September 17, finally doing it at the Dublin Airport at JPY 119.23 = 1.00 EUR. Given the following average monthly exchange rates in 2019, when should he have exchanged the euros for the yen to maximize his Japanese spending money?
Looks like Steven messed up by waiting to exchange the currency on the day of his flight to Japan. The airport spot rate turned out to be the worst for Steven, as the Japanese yen had appreciated versus the euro over the year. The best exchange rate was in February, 2019. Then again, Steven did not have a crystal ball and did not know how the exchange rate would do over the year. Welcome to the dilemma of exchange rates in international travel—and business.
Spot rate on the GTQ=EUR1.00: GTQ 10.5799=EUR1. Spot rate on the EUR=BRL1.00: EUR0.4462=BRL1.
Assumptions Values Amount of Brazlian reais from parents 4,500. Spot rate (BRL=EUR1.00) 10. Spot rate (EUR=GTQ1.00) 0.
a. What is the BRL to GTQ cross rate?
Cross rate (BRL=GTQ1.00) 4.
BRL to GTQ = BRL=EUR1.00 x EUR=GTQ1.
b. How many Guatemalan quetzals will he get for his Brazilian reais?
Converting your reais into quetzals 21,
Problem 1.7 Isaac Díez of Brazil
Isaac Díez Peris lives in Rio de Janeiro, Brazil. While attending school in Spain he meets Juan Carlos Cordero from Guatemala. Over the summer holiday Isaac decides to visit Juan Carlos in Guatemala City for a couple of weeks. Isaac's parents give him some spending money, 4,500 Brazilian real (BRL). Isaac wants to exchange it for Guatemlan quetzals (GTQ). He collects the following rates:
a. What is the Brazilian reais to Guatemalan quetzal cross rate? b. How many Guatemalan quetzals will Isaac get for his Brazlian reais?
Spot rate on the Russian rubles to U.S. dollar cross rate RUB 30.96=USD1. Spot rate on the Japanese yen to U.S. dollar cross rate JPY84.02=USD1.
Assumptions Values Beginning your trip with rubles 450,000. Spot rate (RUB=1.00 USD) 30. Spot rate (JPY=1.00 USD) 84.
a. What is the Russian ruble to Japanese yen cross rate?
Cross rate (RUB=JPY1.00) 0.
RUB to JPY = RUB=USD1.00 ÷ JPY=USD1.
b. How many Japanese yen will you obtain for your Russian rubles?
Converting your Rubles into yen 1,221,
a. What is the Russian ruble/ yen cross rate? b. How many Japanese yen will you obtain for your Russian rubles?
Problem 1.8 Moscow to Tokyo
After spending a week in Moscow you get an email from your friend in Japan. He can get you a really good deal on a plane ticket and wants you to meet him in Tokyo next week to continue your post-graduation celebratory trip. You have 450,000 Russian rubles (RUB) left in your money pouch. In preparation for the trip you want to exchange your Russian rubles for Japanese yen (JPY), so you get the following quotes:
Japanese Britih European Chinese Russian United States Net Income Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary 2013 JPY 1,500 GBP 100.00 EUR 204.00 CNY 168.00 RUB 124.00 USD 360. 2014 JPY 1,460 GBP 106.40 EUR 208.00 CNY 194.00 RUB 116.00 USD 382.
The average exchange rate for each year, by currency pairs, was the following. Use this data to answer the following questions.
Exchange Rate JPY = 1 USD USD = 1 GBP USD = 1 EUR CNY = 1 USD RUB = 1 USD USD 2013 97.57 1.5646 1.3286 6.1484 31.86 1. 2014 105.88 1.6473 1.3288 6.1612 38.62 1.
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 is often called a "constant currency basis -- what was the change in corporate earnings?
Japanese Britih European Chinese Russian United States Consolidated Net Income (USD) Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Earnings 2013 USD 15.37 USD 156.46 USD 271.03 USD 27.32 USD 3.89 USD 360.00 USD 834. 2014 USD 13.79 USD 175.27 USD 276.39 USD 31.49 USD 3.00 USD 382.00 USD 881. 5.74%
b. If the exchange rates for 2013 are used for both years, earnings from individual subsidiaries and consolidation appear as follows.
Japanese Britih European Chinese Russian United States Consolidated Net Income (USD) Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary Earnings 2013 USD 15.37 USD 156.46 USD 271.03 USD 27.32 USD 3.89 USD 360.00 USD 834. 2014 USD 14.96 USD 166.47 USD 276.35 USD 31.55 USD 3.64 USD 382.00 USD 874. Change (USD 0.41) USD 10.01 USD 5.31 USD 4.23 (USD 0.25) USD 22.00 USD 40. Percent change -2.7% 6.4% 2.0% 15.5% -6.5% 6.1% 4.90%
Total percent change = (1 + Actual percent change) x (1 + Foreign exchange percent change) -
When rearranged to solve for the FX percent change:
FX percent change = (1.0574)/(1.0490) - 1 = 0.80%
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. 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?
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:
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.
Problem 1.10 Blundell Biotech
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.)
b. What has been the impact on Peng's margins from this pricing strategy?
Fixed Rmb Pricing of the PT350 Plasma Cutting Torch
Cost Margin Price Margin Average Rate Price Percent Chg Year (Rmb) (Rmb) (Rmb) (percent) (Rmb/US$) (US$) in US$ Price 2007 16,000 2,000 18,000 11.1% 7.61 2,365 --- 2008 15,400 2,600 18,000 14.4% 6.95 2,590 9.50% 2009 14,800 3,200 18,000 17.8% 6.83 2,635 1.76% 2010 14,700 3,300 18,000 18.3% 6.77 2,659 0.89% 2011 14,200 3,800 18,000 21.1% 6.46 2,786 4.80% 2012 14,400 3,600 18,000 20.0% 6.31 2,853 2.38% 2013 14,600 3,400 18,000 18.9% 6.15 2,927 2.60% 2014 14,800 3,200 18,000 17.8% 6.16 2,922 -0.16% Cumulative 23.54%
Problem 1.11 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?
French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s, loccal currency) (€) (CHF) (£) (DKK) Earnings before taxes (EBT) $2,500 400.00 € 2,100 4,500. Corporate income tax rate 33% 25% 20% 23% Average exchange rate for the period ------ CHF1.0335/€ £0.7415/€ DKK7.4642/€
Problem 1.13 EuroVirtual’s Consolidated Earnings
EuroVirtual pays different tax rates for each of its country’s operations. a. What are its earnings per share in euros after deducting taxes? b. What is the proportion of EuroVirtual’s consolidated EBT that arises from each country? c. What is the proportion of income generated outside France?
French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s) (euros, €) (CHF) (GBP, £) (DKK)
Earnings before taxes, EBT (local currency) 2,500.00 400.00 2,100.00 4,500. Less corporate income taxes 33% (832.50) 25% (100.00) 20% (420.00) 23% (1,035.00) Net profits of individual subsidiary 1,667.50 300.00 1,680.00 3,465.
Avg exchange rate for the period (fc/$) ------ 1.0335 0.74 7. Net profits of individual subsidiary (€) $ 1,667.50 $ 290.28 $ 2,265.68 $ 464.
Consolidated profits (total across units) $ 4,687. Total diluted shares outstanding (000s) 650.
a. Consolidated earnings per share (EPS) $ 7.
b. Proportion of total profits originating by country 35.6% 6.2% 48.3% 9.9%
c. Proportion of total profits originating from outside France 64.4%
Problems 13 through 17 are based on EuroVirtual, a France-based multinational IT firm. In addition to its home operations in France, EuroVirtual owns and operates subsidiaries in Switzerland, the United Kingdom, and Denmark. Currently, it has 650,000 shares outstanding on the pan-European stock exchange, Euronext. The following table summarizes the business performance of EuroVirtual:
EuroVirtual
French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s) (€) (CHF) (£) (DKK)
Earnings before taxes, EBT (local currency) € 2,500.00 400.00 CHF £ 2,100.00 DKK 4,500. Less, corporate income taxes 33% (832.50) 25% (100.00) 20% (420.00) 23% (1,035.00) Net profits of the individual subsidiary (€) 1,667.50 300.00 1,680.00 3,465.
Average exchange rate for the period — 1.0335 0.74 7. Net profits of the individual subsidiary (€) 1667.50 290.28 2265.68 464.
Consolidated profits (total across units, €) 4,687. Total diluted shares outstanding (000s) 650.
Baseline EPS (€) 7.
French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s) (euros, €) (CHF) (GBP, £) (DKK)
Earning before taxes, EBT (local currency) 2500.00 400.00 CHF 2100.00 4500. Less, corporate income taxes 35% (875.00) 25% (100.00) 20% (420.00) 23% (1,035.00) Net profits of the individual subsidiary (€) 1,625.00 300.00 1,680.00 3,465.
Average exchange rate for the period — 1.2000 0.74 7. Net profits of the individual subsidiary (€) 1625.00 250.00 2265.68 464.
Consolidated profits (total across units, €) 4,604. Total diluted shares outstanding (000s) 650.
“New” EPS (€) 7.
EPS change from the baseline -1.8%
Problem 1.14 NexusTech's EPS Sensitivity to Exchange Rates (A)
CHF against the euro
On January 15, 2015, the Swiss National Bank (SNB) decided to unpeg the franc, which had been fixed at CHF1.20/€ since 2011. Suppose the SNB was to reverse its decision and readopt the previous peg. How would this affect the consolidated EPS of EuroVirtual, if all other exchange rates, tax rates, and earnings remain unchanged?
Baseline exchange rate — 1.0335 £ 0.74 7. Percent change (+ appreciation, - depreciation) 15% 15% 15% New exchange rate 0.8987 0.6448 6.
Appreciation Case French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s) (euros, €) (CHF) (GBP, £) (DKK)
Earnings before tax, EBT (local currency) € 2,500.00 400.00 CHF £ 2,100.00 DKK4,500. Less, corporate income taxes 33% (832.50) 25% (100.00) 20% (420.00) 23% (1,035.00) Net profits of the individual subsidiary (€) 1,667.50 300.00 1,680.00 3,465.
Average exchange rate for the period — 0.8987 0.64 6. Net profits of the individual subsidiary (€) 1,667.50 333.82 2,605.53 533.
Consolidated profits (total across units, €) 5,140. Total diluted shares outstanding (000s) 650.
Baseline EPS (€) 14.
EPS, if foreign currencies appreciate 7.91 EPS has changed by -46.5%
Baseline exchange rate — 1.0335 0.74 7. Percent change (+ appreciation, - depreciation) -20% -20% -20% New exchange rate 1.2919 0.9269 9.
Depreciation Case French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s) (euros, €) (CHF) (GBP, £) (DKK)
EBT (local currency) € 2,500.00 400.00 CHF £ 2,100.00 DKK4,500. Less, corporate income taxes 33% (832.50) 25% (100.00) 20% (420.00) 23% (1,035.00) Net profits of the individual subsidiary (€) 1,667.50 300.00 1,680.00 3,465.
Average exchange rate for the period — 1.2919 0.9269 9. Net profits of the individual subsidiary (€) 1,667.50 232.22 1,812.54 371.
Consolidated profits (total across units, €) 4,083. Total diluted shares outstanding (000s) 650.
Baseline EPS (€) 14.
EPS, if foreign currencies depreciate 6.28 EPS has changed by -57.5%
Problem 1.16 EuroVirtual’s EPS and Euro Appreciation/Depreciation
Since its introduction in 2003, the euro has been fluctuating against major global currencies. a. What is the impact of a 15% appreciation of all major currencies against the euro on the consolidated EPS of EuroVirtual? b. What is the impact of a 20% depreciation of all major currencies against the euro on the consolidated EPS of EuroVirtual?
French Parent Swiss British Denmark Company Subsidiary Subsidiary Subsidiary Business Performance (000s) (€) (CHF) (£) (DKK)
Earnings before tax, EBT (local currency) € 2,500.00 400.00 CHF £ 2,100.00 DKK4,500. Less, corporate income taxes 33% (832.50) 25% (100.00) 10% (210.00) 23% (1,035.00) Net profits of the individual subsidiary (€) 1,667.50 300.00 1,890.00 3,465.
Average exchange rate for the period — 1.0335 0.74 7. Net profits of the individual subsidiary (€) 1,667.50 290.28 2,548.89 464.
Consolidated profits (total across units, €) 4,970. Total diluted shares outstanding (000s) 650.
Consolidated EPS (€) 7.
Tax payments by each country (€) 832.50 96.76 283.21 138.
a. Total global tax bill, US$ $ 1,351.
b. What is Americo's effective tax rate?
EBT by country, US$ $ 2,500.00 $ 387.03 $ 2,832.10 $ 602. Consolidated EBT $ 6,322. Total tax bill $ 1,351. Effective tax rate 21.4%
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) 4,500.00 6,250.00 5,000.00 2,500. Less corporate income taxes 35% (1,575.00) 25% (1,562.50) 28% (1,400.00) 30% (750.00) Net profits of individual subsidiary 2,925.00 4,687.50 3,600.00 1,750.
Avg exchange rate for the period (fc/$) ------ 1.8000 0.7018 7. Net profits of individual subsidiary (US$) $ 2,925.00 $ 2,604.17 $ 5,129.67 $ 225.
Consolidated profits (total across units) $ 10,884. Total diluted shares outstanding (000s) 650.
Consolidated earnings per share (EPS) $ 16.
EBT by country, US$ $ 4,500.00 $ 3,472.22 $ 7,124.54 $ 322.
Tax payments by country in US dollars $ 1,575.00 $ 868.06 $ 1,994.87 $ 96.
Consolidated EBT $ 15,419. Total tax bill $ 4,534. Effective tax rate 29.4%
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?
Problem 1.17 EuroVirtual’s Global Taxation and Effective Tax Rate
All MNEs attempt to minimize their global tax liabilities. Return to the original set of baseline assumptions and answer the following questions regarding Euro Virtual’s global tax liabilities:
a. What is the total corporate income tax that EuroVirtual pays for all its operations in euros? b. What is its effective tax rate (total taxes paid as a percentage of pre-tax earnings)? c. Suppose the U.K. decides to reduce its corporate tax rate to 10%, leading to a rise in EuroVirtual’s British subsidiary’s earnings before tax to £3,000,000. What would be the impact on EuroVirtual’s EPS?
Value Price of a seat in British pounds (£) 349. Spot rate, euros per pound (€=£1.00) 1. Price of seat in euros 406. Spot rate, dollars per euro ($=€1.00) 1. Price of seat in U.S. dollars 492.
Problem 2.2 Euro 2021 Ticket Prices
Tickets for the Euro 2020 Championship match between Germany and France, to be held in Munich on June 15, 2021 (Euro 2020 was canceled due to the global pandemic, so 2020 championships were held in 2021), were on sale for £349 per seat. If current spot exchange rates were $1.2127 = €1.00 and €1.1645= £1.00, what was the U.S. dollar price of a seat for the match?
Answer: Convert the British pound price per seat into euros, then euros into US dollars.
Assumptions Values Price of an ounce of gold in French francs (FRF/oz) FRF 380. Price of an ounce of gold in sterling pounds (GBP/oz) 4.
What is the implied GBP/FRF rate? 0. (GBP price of an ounce/FRF price of an ounce)
Or, if expressed as FRF/GBP FRF 84.
Problem 2.3 Gilded Question
In 1923, one ounce of gold costs 380 French francs (FRF). If, at the same time, one ounce of gold could be purchased in Britain for £4.50, what was the exchange rate between the French franc and the British pound?
