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Problem 1.

6 Luzon Industries' Consolidated Results


Problems 6 through 10 are based on Luzon Industries. Luzon 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. Luzon is traded on the NADSAQ. Garrison currently has 650,000 shares
outstanding. The basic operating characteristics of the various business units are as follows:

Business Performance (000s)

US Parent
Company
(US$)

Brazilian
Subsidiary
(reais, R$)

German
Subsidiary
(euros, )

Chinese
Subsidiary
(yuan, Y)

Earnings before taxes, EBT (local currency)


Less corporate income taxes
Net profits of individual subsidiary

4,500.00
(1,575.00)
2,925.00

6,250.00
(1,562.50)
4,687.50

4,500.00
(1,800.00)
2,700.00

2,500.00
(750.00)
1,750.00

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

35%

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

9,602.22
650.00

a. Consolidated earnings per share (EPS)

14.77

b. Proportion of total profits originating


by country

30.5%

c. Proportion of total profits originating


from outside the United States

69.5%

25%

1.8000
2,604.17

27.1%

40%

0.7018
3,847.25

40.1%

30%

7.7500
225.81

2.4%

Problem 1.9 Luzon'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. What would be the impact on Luzons
consolidated EPS if all foreign currencies were to appreciate 20% or depreciate 20% against the U.S. dollar?
Baseline exchange rate (fc/$)
Percent change (+ appreciation, - depreciation)
New exchange rate (fc/$)
Appreciation Case
Business Performance (000s)
Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary

1.8000
20%
1.5000

0.7018
20%
0.5848

7.7500
20%
6.4583

US Parent
Company
(US$)

Brazilian
Subsidiary
(reais, R$)

German
Subsidiary
(euros, )

Chinese
Subsidiary
(yuan, Y)

4,500.00
(1,575.00)
2,925.00

35%

Avg exchange rate for the period (fc/$)


Net profits of individual subsidiary (US$)

-----

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

10,937.67
650.00

Baseline earnings per share (EPS)

14.77

EPS if foreign currencies appreciate

16.83

Baseline exchange rate (fc/$)


Percent change (+ appreciation, - depreciation)
New exchange rate (fc/$)
Depreciation Case
Business Performance (000s)
Earnings before taxes, EBT (local currency)
Less corporate income taxes
Net profits of individual subsidiary
Avg exchange rate for the period (fc/$)
Net profits of individual subsidiary (US$)

4,500.00
(1,800.00)
2,700.00

40%

1.5000
3,125.00

EPS has changed by:

2,500.00
(750.00)
1,750.00

30%

0.5848
4,616.70

6.4583
270.97

13.9%

-----

1.8000
-20%
2.2500

0.7018
-20%
0.8773

7.7500
-20%
9.6875

US Parent
Company
(US$)

Brazilian
Subsidiary
(reais, R$)

German
Subsidiary
(euros, )

Chinese
Subsidiary
(yuan, Y)

4,500.00
(1,575.00)
2,925.00

35%

6,250.00
(1,562.50)
4,687.50

25%

-----2,925.00

Consolidated profits (total across units)


Total diluted shares outstanding (000s)

8,266.78
650.00

Baseline earnings per share (EPS)

14.77

EPS if foreign currencies depreciate

12.72

6,250.00
(1,562.50)
4,687.50

25%

4,500.00
(1,800.00)
2,700.00

40%

2.2500
2,083.33

EPS has changed by:

0.8773
3,077.80

-13.9%

2,500.00
(750.00)
1,750.00

30%

9.6875
180.65