Problem 1.

12 Garrison Industries' Consolidated Results

Problems 12 through 15 are based on Garrison Industries. Garrison is a U.S.-based multinational manufacturing firm, with wholly owned subsidiaries
in Brazil, Germany, and China, in addition to domestic operations in the United States. Garrison is traded on the NADSAQ. Garrison currently has
650,000 shares outstanding. The basic operating characteristics of the various business units is as follows.

US Parent Brazilian German Chinese

Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)

Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% 25% 40% 30%
Net profits of individual subsidiary

Avg exchange rate for the period (fc/$) ------ 3.5000 0.92600 8.1000
Net profits of individual subsidiary (US$)

Consolidated profits (total across units)

Total diluted shares outstanding (000s) 650.00

a. Consolidated earnings per share (EPS)

b. Proportion of total profits originating

by country

c. Proportion of total profits originating

from outside the United States
Problem 1.13 Garrison's EPS Sensitivity to Exchange Rates

Assume a major political crisis wracks Brazil, first affecting the value of the Brazilian reais and, subsequently, inducing an economic recession within
the country.

US Parent Brazilian German Chinese

Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)

Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% 25% 40% 30%
Net profits of individual subsidiary

Avg exchange rate for the period (fc/$) ------ 4.5000 0.92600 8.1000
Net profits of individual subsidiary (US$)

Consolidated profits (total across units)

Total diluted shares outstanding (000s) 650.00

Baseline earnings per share (EPS)

a. If Brazilian real falls to R$4.50/$: EPS EPS % Change

US Parent Brazilian German Chinese

Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)

Earnings before taxes, EBT (local currency) 4,500.00 5,800.00 4,500.00 2,500.00
Less corporate income taxes 35% 25% 40% 30%
Net profits of individual subsidiary

Avg exchange rate for the period (fc/$) ------ 4.5000 0.92600 8.1000
Net profits of individual subsidiary (US$)

Consolidated profits (total across units)

Total diluted shares outstanding (000s) 650.00

Baseline earnings per share (EPS)

b. If both the real and the earnings in EPS % Change

Brazil fall, Garrison's EPS is now:
Problem 1.14 Garrison's Earnings & The Fall of the Dollar

The U.S. dollar has experience significant swings in value against most of the world's currencies in recent years. What would be the impact on
Garrison’s consolidated EPS if all foreign currencies were to appreciate 20% or depreciate 20% against the U.S. dollar?

Baseline exchange rate (fc/$) ----- 3.5000 0.9260 8.1000

Percent change (+ appreciation, - depreciation) 20% 20% 20%
New exchange rate (fc/$)

Appreciation Case US Parent Brazilian German Chinese

Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)

Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% 25% 40% 30%
Net profits of individual subsidiary

Avg exchange rate for the period (fc/$) ------

Net profits of individual subsidiary (US$)

Consolidated profits (total across units)

Total diluted shares outstanding (000s) 650.00

Baseline earnings per share (EPS)

EPS if foreign currencies appreciate EPS has changed by:

Baseline exchange rate (fc/$) ----- 3.5000 0.9260 8.1000

Percent change (+ appreciation, - depreciation) -20% -20% -20%
New exchange rate (fc/$)

Depreciation Case US Parent Brazilian German Chinese

Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)

Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% 25% 40% 30%
Net profits of individual subsidiary

Avg exchange rate for the period (fc/$) ------

Net profits of individual subsidiary (US$)

Consolidated profits (total across units)

Total diluted shares outstanding (000s) 650.00

Baseline earnings per share (EPS)

EPS if foreign currencies depreciate EPS has changed by:

Problem 1.15 Garrison's Earnings & Global Taxation

All MNEs attempt to minimize their global tax liabilities. Return to the original set of baseline assumptions and answer the following questions
regarding Garrison’s global tax liabilities.

What is the total amount – in U.S. dollars – which Garrison is paying across its global business in corporate income taxes? What is Garrisons effective
tax rate (total taxes paid as a proportion of pre-tax profit)?

What would be the impact on Garrison’s EPS and global effective tax rate if Germany instituted a corporate tax reduction to 28%, and Garrison’s
earnings before tax in Germany rose to €5,000,000?

US Parent Brazilian German Chinese

Company Subsidiary Subsidiary Subsidiary
Business Performance (000s) (US$) (reais, R$) (euros, €) (yuan, Y)

Earnings before taxes, EBT (local currency) 4,500.00 6,250.00 4,500.00 2,500.00
Less corporate income taxes 35% 25% 40% 30%
Net profits of individual subsidiary

Avg exchange rate for the period (fc/$) ------ 3.5000 0.92600 8.1000
Net profits of individual subsidiary (US$)

Consolidated profits (total across units)

Total diluted shares outstanding (000s) 650.00

Consoldiated earnings per share (EPS)

Tax payments by country in US dollars

a. Total global tax bill, US$

b. What is Garrison's effective tax rate?

EBT by country, US$

Consolidated EBT
Total tax bill
Effective tax rate

c. What would be the impact on Garrison's EPS and global effective tax rate if Germany instituted a tax cut to 28% and German subsidiary
earnings rose to 5 million euros?

After plugging in the new values, EPS is

and the effective tax rate would be