Problem 1.

7 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 recessi 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 earn exchange rates remaining the same? U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 9,602.22 650.00 14.77 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 1.8000 $ 2,604.17

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Baseline earnings per share (EPS)

35%

25%

40%

$ $

Brazilian reais falls in value against the U.S. dollar U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 8,560.56 650.00 13.17 -10.8% Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 3.0000 $ 1,562.50

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) "New" earnings per share (EPS) EPS change from baseline:

35%

25%

40%

$ $

Problem 1.8 Americo's EPS Sensitivity to Exchange Rates (B)

Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais and, subsequently, inducing an economic recessi 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 be Brazil fell as a result of the recession to R$5,8000,000? U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 9,602.22 650.00 14.77 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 1.8000 $ 2,604.17

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Baseline earnings per share (EPS)

35%

25%

40%

$ $

Brazilian reais falls in value against the U.S. dollar and Americo's Brazilian sales decline U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 8,448.06 650.00 13.00 -12.0% Brazilian Subsidiary (reais, R$) 5,800.00 (1,450.00) 4,350.00 3.0000 $ 1,450.00

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Revised earnings per share (EPS) Change in EPS from both changes:

35%

25%

40%

$ $

Problem 1.9 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 Americos consolidated EPS if all foreign currencies were to appreciate 20% against the U.S. dollar? b. What would be the impact on Americos consolidated EPS if all foreign currencies were to 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 Avg exchange rate for the period (fc/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Baseline earnings per share (EPS) EPS if foreign currencies appreciate ----1.8000 20% 1.5000 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 1.5000 $ 3,125.00

U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00

35%

25%

40%

$ 10,937.67 650.00 $ $ 14.77 16.83 EPS has changed by:

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Baseline earnings per share (EPS)

-----

1.8000 -20% 2.2500 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 2.2500 $ 2,083.33

U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 8,266.78 650.00 14.77

35%

25%

40%

$ $

EPS if foreign currencies depreciate

12.72

EPS has changed by:

Problem 1.10 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 questio Americos 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 Luzon's effective tax rate (total taxes paid as a proportion of pre-tax profit)?

c. What would be the impact on Americos EPS and global effective tax rate if Germany instituted a corporate tax reduction to 28%, and Am earnings before tax in Germany rose to 5,000,000? U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 9,602.22 650.00 14.77 1,575.00 $ 868.06 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 1.8000 $ 2,604.17

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Consoldiated earnings per share (EPS) Tax payments by country in US dollars

35%

25%

40%

$ $

$ $

a. Total global tax bill, US$

5,104.66

b. What is Americo's effective tax rate? EBT by country, US$ Consolidated EBT Total tax bill Effective tax rate $ 4,500.00 $ 3,472.22

$ 14,706.89 $ 5,104.66 34.7%

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 sub earnings rose to 5 million euros? U.S. Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 1.8000 $ 2,604.17

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/$) Net profits of individual subsidiary (US$) Consolidated profits (total across units) Total diluted shares outstanding (000s) Consoldiated earnings per share (EPS) EBT by country, US$ Tax payments by country in US dollars Consolidated EBT Total tax bill Effective tax rate

35%

25%

28%

$ 10,884.64 650.00 $ $ $ 16.75 4,500.00 1,575.00 $ 3,472.22 $ 868.06

$ 15,419.34 $ 4,534.70 29.4%

equently, inducing an economic recession within the in value to R$3.00/$, with all other earnings and

German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.7018 $ 3,847.25

Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 7.7500 $ 225.81

30%

ar German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.7018 $ 3,847.25 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 7.7500 $ 225.81

30%

equently, inducing an economic recession within the lue of the reais to R$3.00/$, earnings before taxes in

German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.7018 $ 3,847.25

Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 7.7500 $ 225.81

30%

razilian sales decline German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.7018 $ 3,847.25 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 7.7500 $ 225.81

30%

ecent years. ate 20% against the U.S. dollar? ate 20% against the U.S. dollar? 0.7018 20% 0.5848 German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.5848 $ 4,616.70 7.7500 20% 6.4583 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 6.4583 $ 270.97

30%

13.9%

0.7018 -20% 0.8773 German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.8773 $ 3,077.80

7.7500 -20% 9.6875 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 9.6875 $ 180.65

30%

-13.9%

ptions and answer the following questions regarding

orporate income taxes?

orporate tax reduction to 28%, and Americos

German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.7018 $ 3,847.25

Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 7.7500 $ 225.81

30%

$ 2,564.83

96.77

$ 6,412.08

$ 322.58

ed a tax cut to 28% and German subsidiary German Subsidiary (euros, ) 5,000.00 (1,400.00) 3,600.00 0.7018 $ 5,129.67 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 7.7500 $ 225.81

30%

$ 7,124.54 $ 1,994.87

$ 322.58 $ 96.77