ninja1024

janakisri Wrote:
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> 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.

Pegasus2008

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.

yospaghetti

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)

zhaoyp

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

llxx

mireille whats the answer!

ppls

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.

wizofoz

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

economicz

That makes perfect sense in retrospect.....