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