Type
Quiz
Book Title
Multinational Business Finance 14th Edition
ISBN 13
978-0133879872

978-0133879872 Chapter 1 Excel

June 1, 2020
After completing the table below, answer the following questions.
a. Which city in the table is truly the cheapest date?
b. Which city in the table is the most expensive-cheap date?
c. If the exchange rate in Moscow on the Russian ruble (RUB) was 0.04200, instead of 0.0283, what would be the USD price?
d. If the exchange rate in Shangahi was CNY 6.66 = 1 USD, what would be its cost in USD and relative to a cheap date in New York City?
Cheap Date in Exchange Exchange Rate Cheap Date in Relative
Problem 1.1 Comparing Cheap Dates Around the World
Comparison of prices or costs across different country and currency environments requires the translation of the local currency into a
single common currency. This is most meaningful when the comparison is for the identical or near-identical product or service across
countries. Deutsche Bank has recently started publishing a comparison of cheap dates -- and evening on the town for two to eat at
McDonald's, see a movie, and drink a beer. Once all costs are converted to a common currency, the U.S. dollar in this case, the cost
of the date can be compared across cities relative to the base case of a cheap date in USD in New York City.
Source: Data drawn from The Random Walk, Mapping the World's Prices 2014 , Deutsche Bank Research, 09 May 2014, Figures 30 and 32, with
author calculations. 'Relative to NYC' is calculated as = Cheap Date in USD/93.20.
Note: The cheap date combines the local currency cost of a cab ride for two, two McDonald's hamburgers, two soft drinks, two movie tickets, and
two beers. In 2013 Deutsche Bank had included sending a bouquet of roses in the date, but did not include that in the 2014 index, making the two
years not directly comparable.
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 360.00
2014 JPY 1,460 GBP 106.40 EUR 208.00 CNY 194.00 RUB 116.00 USD 382.00
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 1.0000
2014 105.88 1.6473 1.3288 6.1612 38.62 1.0000
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 was the change in corporate earnings on a "constant currency" basis?
5.74%
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?
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 1.2 Blundell Biotech
Comparative Advantage
Problems 1-5 illustrate an example of trade induced by comparative advantage. They assume that China and France
each have 1,000 production units. With one unit of production (a mix of land, labor, capital, and technology), China
can produce either 10 containers of toys or 7 cases of wine. France can produce either 2 cases of toys or 7 cases of
wine. Thus, a production unit in China is five times as efficient compared to France when producing toys, but
equally efficient when producing wine. Assume at first that no trade takes place. China allocates 800 production
units to building toys and 200 production units to producing wine. France allocates 200 production units to building
toys and 800 production units to producing wine.
What is the production and consumption of China and France without trade?
Problem 1.3 Production and Consumption
Problem 1.4 Specialization
Assume complete specialization, where China produces only toys and France produces only wine. What would be
the effect on total production?
Problem 1.5 Trade at China's Domestic Price
China’s domestic price is 10 containers of toys equals 7 cases of wine. Assume China produces 10,000 containers of toys and exports 2,000 to France. Assume France produces 7,000
cases of wine and exports 1,400 cases to China. What happens to total production and consumption?
Toys Wine
Problem 1.6 Trade at France's Domestic Price
France’s domestic price is 2 containers of toys equals 7 cases of wine. Assume China produces 10,000 containers of toys and exports 400 containers to France. Assume France in turn
produces 7,000 cases of wine and exports 1,400 cases to China. What happens to total production and consumption?
The mid-price for exchange between France and China can be calculated as follows:
Toys Wine
Problem 1.7 Trade at Negotiated Mid-Price
b. What has been the impact on Peng's margins from this pricing strategy?
Problem 1.8 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?
Vitro's U.S. Sales Percent Annual Avg Rate Vitro's U.S. Sales Percent
Year (millions of USD) Change MXN = 1 USD (millions of MXN) Change
2011 USD 820 MXN 12.80 MXN 10,496
2012 USD 842 2.7% MXN 13.30 MXN 11,199 6.7%
2013 USD 845 0.4% MXN 12.70 MXN 10,732 -4.2%
2014 USD 860 1.8% MXN 13.40 MXN 11,524 7.4%
Santiago, however, is a bit uncertain on having his bonus based on the Mexican peso values of U.S. sales. As a
close friend and colleague, what advice would you give him based on your completion of the table below?
Problem 1.9 Santiago Pirolta's Compensation Agreement
Santiago Pirolta has accepted the Managing Director position for Vitro de Mexico's U.S. operations. Vitro is a Mexico-
based manufacturer of flat and custom glass products. Much of its U.S. sales are based on a variety of bottle products,
both mass market (e.g., glass bottles for soft drinks and beer) as well as specialty products (high-end cosmetic bottles
with rare metal coloring and quality). He will live and work in the United States (Dallas, Texas) and wishes to be paid
in US dollars. Vitro has agreed that his base salary of USD350,000 will be paid in U.S. dollars, but Vitro wishes to tie
his annual performance bonus to the Mexican peso value of U.S. sales since Vitro consolidates all final results for
reporting to stockholders in Mexican pesos (MXN).
Problem 1.10 Americo Industries' Consolidate Earnings
Americo Industries - 2010
Americo must pay corporate income tax in each country in which it currently has operations.
a. After deducting taxes in each country, what are Americo's consolidated earnings and consolidated earnings per share in U.S. dollars?
b. What proportion of Americo's consolidated earnings arise from each individual country?
c. What proportion of Americo's consolidated earnings arise from outside the United States?
Problem 1.11 Americo's EPS Sensitivity to Exchange Rates (A)
Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais and, subsequently, inducing an economic recession within the
country. What would be the impact on Americo's consolidated EPS if the Brazilian reais were to fall in value to R$3.00/$, with all other earnings and exchange
rates remaining the same?
Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais and, subsequently, inducing an economic recession within the
country. What would be the impact on Americo's consolidated EPS if, in addition to the fall in the value of the reais to R$3.00/$, earnings before taxes in Brazil
fell as a result of the recession to R$5,8000,000?
Problem 1.12 Americo's EPS Sensitivity to Exchange Rates (B)
Problem 1.13 Americo's Earnings and the Fall of the Dollar
The U.S. dollar has experienced significant swings in value against most of the world's currencies in recent years.
a. What would be the impact on Americo’s consolidated EPS if all foreign currencies were to appreciate 20% against the U.S. dollar?
b. What would be the impact on Americo’s consolidated EPS if all foreign currencies were to depreciate 20% against the U.S. dollar?
U.S. Parent Brazilian German Chinese
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)
Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% (1,575.00) 25% (1,562.50) 40% (1,800.00) 30% (750.00)
Net profits of individual subsidiary 2,925.00 4,687.50 2,700.00 1,750.00
Avg exchange rate for the period (fc/$) ------ 1.8000 0.7018 7.7500
Net profits of individual subsidiary (US$) 2,925.00$ 2,604.17$ 3,847.25$ 225.81$
Consolidated profits (total across units) 9,602.22$
Total diluted shares outstanding (000s) 650.00
Consoldiated earnings per share (EPS) 14.77$
Tax payments by country in US dollars 1,575.00$ 868.06$ 2,564.83$ 96.77$
b. What is Americo's effective tax rate?
Problem 1.14 Americo's Earnings and Global Taxation
All MNEs attempt to minimize their global tax liabilities. Return to the original set of baseline assumptions and answer the following questions regarding
Americo’s global tax liabilities:
a. What is the total amount – in U.S. dollars – which Americo is paying across its global business in corporate income taxes?
b. What is Americo's effective tax rate (total taxes paid as a proportion of pre-tax profit)?
c. What would be the impact on Americo’s EPS and global effective tax rate if Germany instituted a corporate tax reduction to 28%, and Americo’s earnings
before tax in Germany rose to €5,000,000?
U.S. Parent Brazilian German Chinese
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)
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?