The Latimore Company invested $8.5 million in a new plant in Italy when the exchange rate...
The Latimore Company invested $8.5 million in a new plant in Italy when the exchange rate was 1.1500 euros to the dollar. At the end of the year, the rate was 1.2000 euros to the dollar. (Indirect quotes.)
- Did Latimore make or lose money on the exchange rate movement? If so, how much?
- What kind of exchange rate gain or loss was it?
- What was the tax impact if Latimore’s marginal tax rate is 40%?
Homework Answers
| a. Latimore's money has gained in value due to the exchange rate movement by (1.2-1.15)*8.5 mln.= $ 0.425 mlns. |
| b.Translation exchange gain whereby the invetsment of Latimore Company has gained in value due to exchange rate fluctuations of the Euro currency. |
| c. As this excahnge rate fluctuation is capital in nature, they are not taxable, until realised in home currency,ie. $. |
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