Question

Consider a period in which the U.S. dollar strengthens against the euro. How will this affect...

Consider a period in which the U.S. dollar strengthens against the euro. How will this affect the reported earnings of a U.S. based MNC with European subsidiaries?

A.

The reported earning will be lower
B.

The reported earning will be higher
C.

The reported earning will not be affected
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Answer #1

Answer is A.

Reported Earnings will be lower is US dollar strengthens against the Euro. Let us assume that the exchange rate initially was 1$ = 50 Euro. Let say the consolidated earnings in Euro earned by the subsidiaries was 50 Euro. So, when converted into US $, it would have been 1$. But, now, the Euro is depreciating or US $ appreciating, the new exchange rate is 1$ = 100 Euro. This implies 50 Euro earnings would now be equivalent to 0.5$. This is lower than 1$ which was the earlier translated result.

This implies reported earnings will be lower as firsm would incurr a translation loss.

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