标题: FRA - Current rate method [打印本页] 作者: AndyNZ 时间: 2011-7-13 13:44 标题: FRA - Current rate method
The U.S. dollar has been depreciating relative to the local currency over the past year. The use of the current rate method to translate a foreign subsidiary's financial statements to U.S. dollars will most likely have which of the following effects on return on equity (ROE) relative to what the ratio would have been without the effects of translation?
A) ROE will most likely rise.
B) ROE will most likely decline.
C) The impact of the depreciation of the US dollar on ROE is indeterminate.
If the dollar is depreciating, the translation will be supressed, SE is at historical rates either way and NI is at an average rate, so B it will decline because the SE would be higher作者: lucasg85 时间: 2011-7-13 13:44
Assuming no differences in NI or Equity other than the translation adjustment - and given that this is the all current method we are using the translation adjustment is allocated as a portion of equity.
with the dollar depreciating the translation from one period to the next would be less in the domestic currency so with same NI and lower Equity the ROE would most likely rise
Ans.-A作者: spreads 时间: 2011-7-13 13:44
Choice A.
same reasoning as FinNinja
Equity would be lower, given USD is depreciating.
Net Asset position (since company would have equity).
so Equity will carry a negative Cumulative Translation adjustment.
This will reduce equity,
Net Income would be at the average rate - so the reduction in Net Income would not be as much.
NI/CE will thus increase.
CP作者: tarunajwani 时间: 2011-7-13 13:44
I'm thinking Northeastern Student is correct (Option B)?
From reading the question the local currency i.e. not the dollar has appriciated over the year. We want to convert from local currency --> USD / local currency (not stated) --> presentational currency (USD).
Assuming the local currency appriciates against the dollar this would create a positive CTA. Leading on from this there is a higher level of shareholders equity, which in turn would lead to a decrease in ROE (as NI doesn't change as much)
Or it could be that I'm completely wrong and I should go to bed!
(Hmmm, fourth edit, definitely time for bed)
Edited 4 time(s). Last edit at Tuesday, May 25, 2010 at 07:44PM by Smiffy.作者: senlinlang 时间: 2011-7-13 13:44
I disagree. The question is:
which of the following effects on return on equity (ROE) relative to **** what the ratio would have been without the effects of translation? *****
If the USD is depreciating, the average rate will be lower than the current rate. Making up some numbers:
Avg = $0.80
Current = $0.85
NI = 5 (foreign curr)
SE = 100 (foreign curr)
ROE (foreign curr) = 5%
Tranlated:
NI = $4
SE = $85
ROE (USD) = 4.7% ---> B作者: Analyze_This 时间: 2011-7-13 13:44
without using any maths, I believe the answer is B
If the foreign currency is appreciating against the $US, with a net asset position this would result in a gain. An increase in CTA which would increase equity and reduce ROE作者: Sportsman 时间: 2011-7-13 13:44
Agree with B - Local currency is appreciating----> current rate so gain would go into CTA increasing equity thereby reducing ROE.作者: Uranus08 时间: 2011-7-13 13:44
A is my answer.
The problem with calgaryeng's explanation is if the US dollar is depreciating, your exchange rates are backwards. The current rate should be $0.8/1LC and the average rate should be $0.85/1LC.作者: jacksparrow 时间: 2011-7-13 13:44
Used to think A...definitely B upon reflection
Net asset exposure = gain = positive CTA
BS under current rate (higher conversion) vs. Net income (lower conversion FX rate)
Thus, the BS amount will just be plain higher...I think作者: ninja1024 时间: 2011-7-13 13:44
janakisri Wrote:
-------------------------------------------------------
> Equity consists of Common Stock + Retained
> Earnings.
>
> Common Stock is translated at an older ( higher US
> Dollars ) rate.
>
> But Retained Earnings could be translated at a
> higher or lower rate depending on the mixture of
> assets and liabilities .
>
>
> Retained earnings = Asstes - Liabilities - Common
> Stock.
>
> Liabilities are usually debts and other payables ,
> mostly transalated at current rates . Assets can
> be PP&E which are translated at historical or
> current assets / liabilities which ar treated as
> monetary/current.
>
> I'd say because of this confusion that it is not
> clear how ROE will wind up.
>
>
> For a company which reduces its subsidiary's
> common stock portion to nearly zero , the Equity
> portion is mostly retained earnings which could
> fluctutate in step with Net Income , making ROE
> indeterminate
Equity, taken as a whole, is translated at the current rate. While it is true that all of the components of equity are translated at different rates (e.g. common stock is translated at historical, retained earnings is mixed, etc.), the CTA brings equity as a whole to be translated at the current rate.
That's the only way that A (current) = L (current) + E (?). The ? has to be current.作者: Pegasus2008 时间: 2011-7-13 13:44
janakisri Wrote:
-------------------------------------------------------
> But A may not be current under Temporal method .
> Far from it , if the subsidiary has old PP&E
> bought long time ago.
>
> The equation you show would then need historical
> rates to be factored in , so that the Equity is
> really translated at a completely indeterminate
> rate
I agree with your statements. However, the question specifically said current rate method.作者: yospaghetti 时间: 2011-7-13 13:44
topher Wrote:
-------------------------------------------------------
> A is my answer.
>
> The problem with calgaryeng's explanation is if
> the US dollar is depreciating, your exchange rates
> are backwards. The current rate should be $0.8/1LC
> and the average rate should be $0.85/1LC.
No. The ones I posted earlier should be correct. If the USD is depreciating, it would be something like:
Start of year $0.70
End of year $0.85 (i.e. one unit of foreign currency buys more USD... USD depreciating = foreign currency appreciating)
Therefore average is less than current (i.e. $0.80 is consistent with this breakdown)作者: zhaoyp 时间: 2011-7-13 13:44
topher , you are right . I missed the point , which is that this is a "current rate" problem. I think the answer is A) ROE should rise , based on similar net income but lower Equity because of dollar depreciation.
"Equity as a whole translated at current rate" is correct , so the BS item called CTA takes care of any differences between Assets + Liabilities & Common stock conversion rates作者: llxx 时间: 2011-7-13 13:44
mireille whats the answer!作者: ppls 时间: 2011-7-13 13:44
I think it depends on dividends. I think since both NI and SE are rising due to strengthening foreign currency, since NI is usually less than SE, when both top and bottom rise by the same amount, fraction should increase IMO.作者: wizofoz 时间: 2011-7-13 13:44
The correct answer was B) ROE will most likely decline.
Under the current rate method, the equity accounts as a whole are translated at the current rate whereas net income is translated at the average rate. Since the dollar is depreciating, each foreign currency unit is buying more dollars in the denominator relative to the numerator of the equation. Hence, the denominator is increasing and the entire ratio falls.
Thanks for explanations作者: economicz 时间: 2011-7-13 13:44
