Percent Annual Avg Rate Percent
Year (millions of EUR) Change CHF = 1 EUR (millions of CHF) Change
2015 1,000.00€ 1.05 CHF 1,050.00 CHF
Based on French sales, in both euros and francs, you should recommend that Andreas continue to argue for his
performance bonus to be based on the euro value, not the translated franc value.
First, euro sales measured both ways was volatile. The volatility, however, was larger in swiss francs than euros. If
that was the only concern, then it would only be up to Andreas to choose his ‘risk tolerance’ — how much volatility he is
willing to bear in his annual performance bonus.
Problem 1.12 Andreas Delon’s Compensation Agreement
Andreas Delon is a French citizen who has been offered the position of CEO of LakePharma, a large French
pharmaceuticals firm. LakePharma produces high-quality chemicals used by pharmaceutical firms around the world.
Much of the production of LakePharma is sold in Switzerland, which means that Andreas Delon will spend most of his
French Parent Swiss British Denmark
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s, loccal currency) (euros) (CHF) (GBP) (DKK)
Problem 1.13 EuroVirtual’s Consolidated Earnings.
EuroVirtual pays different tax rates for each of its country operations.
a. What are its earnings per share in euros after deducting taxes?
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 CHF 2,100.00£ 4,500.00DKK
Problems 13–17 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. It has 650,000 shares currently outstanding on the pan-European stock exchange: Euronext. The
following table summarizes the business performance of EuroVirtual:
EuroVirtual
Consolidated profits (total across units) 4,687.67€
Total diluted shares outstanding (000s) 650.00
b. Proportion of total profits originating
by country 35.6% 6.2% 48.3% 9.9%
French Parent Swiss British Denmark
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (euros) (CHF) (GBP) (DKK)
33% (832.50) 25% (100.00) 20% (420.00) 23% (1,035.00)
Avg exchange rate for the period —— 1.0335 0.74£ 7.4642
Net profits of individual subsidiary 1,667.50€ 290.28€ 2,265.68€ 464.22€
Baseline earnings per share (EPS) 7.21€
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 CHF 2,100.00£ 4,500.00DKK
Less corporate income taxes
35% (875.00) 25% (100.00) 20% (420.00) 23% (1,035.00)
Net profits of individual subsidiary 1,625.00 300.00 1,680.00 3,465.00
Consolidated profits (total across units) 4,604.89€
Total diluted shares outstanding (000s) 650.00
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 CHF 2,100.00£ 4,500.00DKK
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 3,465.00
Baseline earnings per share (EPS) 7.21€
French Parent Swiss British Denmark
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (euros) (CHF) (GBP) (DKK)
33% (832.50) 25% (50.00) 20% (420.00) 23% (1,035.00)
Consolidated profits (total across units) 4,633.44€
Total diluted shares outstanding (000s) 650.00€
Revised earnings per share (EPS) 7.13€
Change in EPS from both changes: -1.2%
1.2/€, earnings before taxes in Switzerland fell as a result of the recession by half?
Problem 1.15 EuroVirtual’s EPS Sensitivity to Exchange Rates (B)
Appreciation Case 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 CHF 2,100.00£ 4,500.00DKK
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 3,465.00
Baseline earnings per share (EPS) 14.77€
EPS if foreign currencies appreciate 7.91$ EPS has changed by: -46.5%
Baseline exchange rate —– 1.0335 0.74£ 7.4642
Percent change (+ appreciation, – depreciation) -20% -20% -20%
Depreciation Case French Parent Swiss British Denmark
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (euros) (CHF) (GBP) (DKK)
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 15% appreciation of all major currencies against the euro on the consolidated EPS of EuroVirtual?
b. What is the impact of 20% depreciation of all major currencies against the euro on the consolidated EPS of EuroVirtual?
Consolidated profits (total across units) 4,083.64€
Total diluted shares outstanding (000s) 650.00€
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 CHF 3,000.00£ 4,500.00DKK
Less corporate income taxes
33% (832.50) 25% (100.00) 10% (300.00) 23% (1,035.00)
Net profits of individual subsidiary 1,667.50 300.00 2,700.00 3,465.00
Consoldiated earnings per share (EPS) 9.33€
Tax payments by country in euros 832.50€ 96.76€ 404.59€ 138.66€
a. Total global tax bill, US$ 1,472.51$
b. What is Americo’s effective tax rate?
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?
U.S. Parent Brazilian German Chinese
Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)
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$
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$
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?