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1.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.
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?
2.A company is working out of Vienna with operations in New York simultaneously calls Citibank in New York City and Barclays in London. The banks give the following quotes on the euro simultaneously.
Citibank NYC Barclays London
$1.2828–29/€ $1.2824–25/€
Using $2 million or its euro equivalent, determine whether the corporate treasury could make geographic arbitrage profit with the two different exchange rate quotes.
3.Breakeven point; profit; cost function Chloe Enterprises operates a single-product entity. Data relating to the product for 2016 were as follows: Annual volume Selling price per unit Variable manufacturing cost per unit Annual fixed manufacturing costs Variable marketing and distribution costs per unit Annual fixed non-manufacturing costs 32 000 units $60 $28 $120 000 $12 $360 000 Required Calculate the break-even units for 2016. (b) Calculate the profit achieved in 2016. (C) Changes in marketing strategy are planned for 2017. This would increase variable marketing and distribution costs by $4 per unit, and reduce fixed non-manufacturing costs by $80 000 per year. Calculate the units that would need to be sold in 2017 to achieve the same profit as in 2016. (d) Would you recommend the change? Explain. (L02,3)
1.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.
2.
Given $2 million and the following quotes
Bank C - $1.2828–29/€
Bank B - $1.2824–25/€
There are two different arbitrage strategies that can be attempted. The first is to buy euros from bank B and then selll to bank C:
Buy euros Bank B:
Euros to be bought = $2,000,000*Euro/$1.2825
=1,559,454 Euros
Sell euros Bank C
Euros to be sold = 1,559,454 Euros *$1.2828/Euro
=$2000468
The profit/loss can be calculated by subtracting the original starting amount of dollars by post-arbitrage amount:
Profit/loss = $2000468 - $2,000,000
= 468
The second strategu involves buy euros from bank C and selling them to bank B:
Buy euros Bank C:
Euros to be bought - $2,000,000 *Euro/ $1.2829
=1,558,968 Euros
Sell euros Bank B:
Euros to be sold = 1,558,968 Euros * $1.2824/ Euro
= $ 1,999,221
The profit/ loss can be calculated by subtracting the original starting amount of dollars by the post- arbitrage amount :
Profit/Loss - $ 1,999,221 - $2,000,000
= -779.484
In the 1st instance, the arbitager make a profit and in second instance arbitrage cannot make a profit using these quotes.
3.
The Break even units (B) is the point at which Total Revenues = Total Cost
So, B*60 = B*28+120000+B*12+360000
=> B = 480000/20 = 24000 units
So, Breakeven occurs at 24000 units in 2016
b) Profit in 2016 = Total Revenue at operating volume - Total Costs
=32000 * 60 - (32000*28+120000+32000*12+360000)
=$160000
c) New Variable Marketing and Distribution Costs = $12+ $4 = $16 per unit
New Fixed Non Manufacturing costs = $360000- $80000 = $280000
To achieve the same profit of $160000, No of units to be sold (B) is given by
Total Revenue - Total cost = 160000
=> B*60- (B*28+120000+B*16+280000)= 160000
=> B*16 = 160000+ 400000 = 560000
=> B = 35000
So, 35000 units must be sold to achieve the same profit as in 2016
d) As the no of units to achieve the same profit has increased to 35000, the change is not recommended
