Suppose that Canton Co. is a U.S.-based MNC with a foreign subsidiary in Germany, which deals in euros. The local earnings of this German subsidiaover a two-year period are shown in the following table, along with the weighted average exchange rate of the euro and the translated U.S. dollarearnings of the subsidiary.PeriodYear 1Year 2Local Earnings of GermanSubsidiary(Euros, Millions)2020Translated U.S. Dollar Earnings ofWeighted Average ExchangeGerman SubsidiaryRate of Euro$1.20$1.00(Dollars, Millions)$24.00$20.00Suppose that Canton has no earnings from the U.S. and all of it's earnings come from the consolidated earnings from the German subsidiary. Alsosuppose that the price of Canton stock is approximately equal to the mean P/E ratio in the industry multiplied by Canton's EPS. With theseassumptions, theConsolidatedEarnings(Euros, Millions)PeriodEPS (based on 10 millionshares)Mean P/E Ratio(Dollars,Valuation of Canton StockMillions)PriceYear 1Year 2$24.00$20.00$2.4020$48.00$2.0020$40.00Because of ain the weighted average exchange rate of the euro, the valuation of Canton's stock price.

Step 1: Formula: Translated US $ earnings = Earning in Euros * Average Exchange rate for year…

Answered: Suppose that Canton Co. is a U.S.-based…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP2: Part 2: Exchange Rate Behavior

Section: Chapter Questions

Problem 1Q

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Translate the foreign currency financial statements below using the current rate (functional) method. Assume the company was incorporated, began business, and became subsidiary of an US firm on January 1, 2016, and the foreign currency was the functional currency. Date January 1, 2016 January 1, 2019 March 31, 2019 Rate 1 FC=$0.10 1 FC=$0.20 1 FC=$0.25 1 FC=$0.40 1 FC=$0.30 December 31, 2019 Weighted average for 2019 Financial Statements of Street Corporation for the year ended December 31, 2019 FC Rate Dollars Income Statement Net sales Costs and expenses Net income 10,000,000 8,000,000 2,000,000 Statement of Retained Earnings Beginning retained earnings 8,000,000 2,000,000 10,000,000 1,000,000 9,000,000 1,600,000 Net income Subtotal Dividends (declared March 31) Ending retained earnings Balance Sheet Assets Current assets Fixed assets (acquired 1/1/2016) Total assets 13,000,000 82,000,000 95,000,000 Liabilities and stockholders' equity Current liabilities |Long-term debt |Common…
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