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%
Based on Vitro’s U.S. sales, in both U.S. dollars and Mexican pesos, you should recommend that Santiago continue to
argue for his performance bonus to be based on the U.S. dollar value, not the translated Mexican peso value.
First, under the previous Managing Director, U.S. sales measured both ways was volatile. The volatility, however,
was larger in pesos than dollars. If that was the only concern, then it would only be up to Santiago to choose his ‘risk
tolerance’ — how much volatility he is willing to bear in his annual performance bonus.
But more importantly, if his performance was based on the USD value of U.S. sales, he would be measured on the
actual sales which he had direct control over. Santiago does not, and willl not, control the exchange rate between the
dollar and the peso. And changes in that exchange rate could potentially destroy all growth in U.S. sales (and his
bonus) as it did in 2013. In 2013 U.S. sales grew (not much, but they grew), and he would have theoretically recieved
a bonus. But as measured in Mexican pesos in 2013, as a result of a fall in the value of the peso, his performance
would have not been positive — and probably so would be the value of his bonus.
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 1.12 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). Santiago will live and work in the United States (Dallas, Texas)
and wishes to be paid in U.S. 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).
U.S. Parent Brazilian German Chinese
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s, loccal currency) (US$) (reais, R$) (euros, €) (yuan, Y)
Earnings before taxes (EBT) $4,500 R$6,250 € 4,500 Y2,500
Corporate income tax rate 35% 25% 40% 30%
Average exchange rate for the period —— R$1.80/$ €0.7018/$ Y7.750/$
Problem 1.13 Americo Industries’ Consolidate Earnings
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$
Problems 13 through 17 are based on Americo Industries. Americo is a U.S.-based multinational manufacturing firm, with wholly owned subsidiaries in
Brazil, Germany, and China, in addition to domestic operations in the United States. Americo is traded on the NADSAQ. Americo currently has 650,000
shares outstanding. The basic operating characteristics of the various business units is as follows:
Americo Industries – 2015
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?
Consolidated profits (total across units) 9,602.22$
Total diluted shares outstanding (000s) 650.00
a. Consolidated earnings per share (EPS) 14.77$
b. Proportion of total profits originating
by country 30.5% 27.1% 40.1% 2.4%
c. Proportion of total profits originating
from outside the United States 69.5%
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
Baseline earnings per share (EPS) 14.77$
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/$) —— 3.0000 0.7018 7.7500
Net profits of individual subsidiary (US$) 2,925.00$ 1,562.50$ 3,847.25$ 225.81$
Problem 1.14 Americo’s EPS Sensitivity to Exchange Rates (A)
Brazilian reais falls in value against the U.S. dollar
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?
Consolidated profits (total across units) 8,560.56$
Total diluted shares outstanding (000s) 650.00
“New” earnings per share (EPS) 13.17$
EPS change from baseline: -10.8%
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
Baseline earnings per share (EPS) 14.77$
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 5,800.00 4,500.00 2,500.00
Less corporate income taxes 35% (1,575.00) 25% (1,450.00) 40% (1,800.00) 30% (750.00)
Net profits of individual subsidiary 2,925.00 4,350.00 2,700.00 1,750.00
Avg exchange rate for the period (fc/$) —— 3.0000 0.7018 7.7500
Net profits of individual subsidiary (US$) 2,925.00$ 1,450.00$ 3,847.25$ 225.81$
Consolidated profits (total across units) 8,448.06$
Total diluted shares outstanding (000s) 650.00
Revised earnings per share (EPS) 13.00$
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$5,8000,000?
Problem 1.15 Americo’s EPS Sensitivity to Exchange Rates (B)
Brazilian reais falls in value against the U.S. dollar and Americo’s Brazilian sales decline
Change in EPS from both changes: -12.0%
Baseline exchange rate (fc/$) —– 1.8000 0.7018 7.7500
Percent change (+ appreciation, – depreciation) 20% 20% 20%
New exchange rate (fc/$) 1.5000 0.5848 6.4583
Appreciation Case U.S. Parent Brazilian German Chinese
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)
Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% (1,575.00) 25% (1,562.50) 40% (1,800.00) 30% (750.00)
Net profits of individual subsidiary 2,925.00 4,687.50 2,700.00 1,750.00
Avg exchange rate for the period (fc/$) —— 1.5000 0.5848 6.4583
Net profits of individual subsidiary (US$) 2,925.00$ 3,125.00$ 4,616.70$ 270.97$
Consolidated profits (total across units) 10,937.67$
Total diluted shares outstanding (000s) 650.00
Baseline earnings per share (EPS) 14.77$
EPS if foreign currencies appreciate 16.83$ EPS has changed by: 13.9%
Baseline exchange rate (fc/$) —– 1.8000 0.7018 7.7500
Percent change (+ appreciation, – depreciation) -20% -20% -20%
New exchange rate (fc/$) 2.2500 0.8773 9.6875
Depreciation Case 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
Problem 1.16 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?
Avg exchange rate for the period (fc/$) —— 2.2500 0.8773 9.6875
Net profits of individual subsidiary (US$) 2,925.00$ 2,083.33$ 3,077.80$ 180.65$
Consolidated profits (total across units) 8,266.78$
Total diluted shares outstanding (000s) 650.00
Baseline earnings per share (EPS) 14.77$
EPS if foreign currencies depreciate 12.72$ EPS has changed by: -13.9%
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$
a. Total global tax bill, US$ 5,104.66$
b. What is Americo’s effective tax rate?
EBT by country, US$ 4,500.00$ 3,472.22$ 6,412.08$ 322.58$
Consolidated EBT 14,706.89$
Problem 1.17 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?
Total tax bill 5,104.66$
Effective tax rate 34.7%
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 2,500.00
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 1,750.00
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$ 5,129.67$ 225.81$
Consolidated profits (total across units) 10,884.64$
Total diluted shares outstanding (000s) 650.00
Consoldiated earnings per share (EPS) 16.75$
EBT by country, US$ 4,500.00$ 3,472.22$ 7,124.54$ 322.58$
Tax payments by country in US dollars 1,575.00$ 868.06$ 1,994.87$ 96.77$
Consolidated EBT 15,419.34$
Total tax bill 4,534.70$
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?