Question

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.)

  1. Did Latimore make or lose money on the exchange rate movement? If so, how much?

  1. What kind of exchange rate gain or loss was it?

  1. What was the tax impact if Latimore’s marginal tax rate is 40%?
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Answer #1
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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