Q81. 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.

答案和详解如下：

Q81. 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.

Correct answer is B)

ROE = Net Income / Equity. 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.

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