Problem 1.

8 Luzon's EPS Sensitivity to Exchange Rates (B)

Assume that subsequent to the fall of the Brazilian reais versus the U.S. dollar, the Brazilian economy falls into recession. The result is a serious reduction in sales in the Brazilian subsidiary; sales in Brazil fall from R$6.25 million to R$5.8 million. Please fill in the blanks below. US Parent Company (US$) 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 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

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%

30%

$ $

Brazilian reais falls in value against the U.S. dollar and Luzon's Brazilian sales decline US 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 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

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) Percent change in EPS (compared to baseline):

35%

25%

40%

30%

$ $

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? Please fill in all the blanks below. IMPORTANT NOTE: If exchange rates (below) had been given as $/fc, i.e. the dollar price of one unit of foreign currency, then we would use: New exchange rate ($/fc) = Old Exchange Rate * (1 + Percent Change). However, as the exchange rates are given as fc/$, i.e. foreign currency price of one dollar, we need to use: New exchange rate (fc/$) = Old Exchange Rate / (1 + Percent Change). Also remember to convert percents into decimals first: i.e. 20% must be written as 0.2 in these Excel formulas.

Baseline exchange rate (fc/$) Percent change ('+' means appreciation, '-' means depreciation) New exchange rate (fc/$) 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

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1.8000 20% 1.4400 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 1.4400 3,255.21

0.7018 20% 0.5614 German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.5614 4,809.06

7.7500 20% 6.2000 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 6.2000 282.26

US Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 11,271.53 650.00 14.77

35%

25%

40%

30%

$ $

17.34

Percent change in EPS (from baseline):

17.4%

Baseline exchange rate (fc/$) Percent change ('+' means appreciation, '-' means depreciation) New exchange rate (fc/$) 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) EPS if foreign currencies depreciate

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1.8000 -20% 2.1600 Brazilian Subsidiary (reais, R$) 6,250.00 (1,562.50) 4,687.50 2.1600 2,170.14

0.7018 -20% 0.8422 German Subsidiary (euros, ) 4,500.00 (1,800.00) 2,700.00 0.8422 3,206.04

7.7500 -20% 9.3000 Chinese Subsidiary (yuan, Y) 2,500.00 (750.00) 1,750.00 9.3000 188.17

US Parent Company (US$) 4,500.00 (1,575.00) 2,925.00 -----2,925.00 8,489.35 650.00 14.77

35%

25%

40%

30%

$ $

13.06

Percent change in EPS (from baseline):

-11.6%