Machinery International (A) Harvard Case Solution & Analysis

1     Question3

Why does Deutz’s have a Re-measurement gain (or loss) and a translation gain (or loss) in 2001? (Explain with words rather than numbers).

1.1   Answer 3

The re-measurement component gains and losses is the fair value of hedging instruments and unrealized gain or losses. The re-measurement gain/loss arises due to the parent company and subsidiary company with the relation foreign currencies. Income arising from subsidiary or sister concern will be transported to the parent or holding company. The parent company means that, a company having more company underits one umbrella while on the other hand, the subsidiary company means that the company controlled by another company which have the share of fifty percent. Furthermore, exchange rate differs at different date or time period will be the re-measurement of the gain and loss. Moreover in this case material, transactional risk is graduallygrowingas the foreign exchange rate is fluctuating with its economic consequences and their effects comes indollar where it isappreciating and depreciating. Further,impairment losses are not the part of re-measurement of gain or loss due to the hedging factors but they are supposed to be recorded as anisolated expenditure.

The Translational gain/loss is the amount that is incorporated by the parent company. Further, it is translated to the subsidiary company`s assets and liability with respect to the functional currency.The difference in the rate will be the cause of fluctuation in the translational gain and loss. Moreover, the company has to convert its German currency into dollar currency. The reason for the change is because of the currency of the dollar is declining against the Deutsche Mark.This reactions occurs from the economic side of the country. Most of the currency is based on the performance of the economy of the country. The effects come in the Gross Domestic Product and Gross National Product. While for this reason, Machinery Internationalis translating German Deutsche mark into U.S. dollars. The effect comes up in the gain and loss of translational with respect to the“Machinery International”.

2     QUESTION 4

What differences do the choice of functional currency make in the GermanSubsidiary’s dollar statement results and its key financial ratios? Explain the reasons for these differences.

2.1   Answer 4

The difference of the functional Currencies is evaluated on various aspects of the financial position and profit and loss of the company with respect to the financial ratios and their new impact of the gain and loss. Now this would impact on the different financial ratios of the Machinery International. Moreover, the United States dollar is depreciating against the Deutsche Mark (DM) due to the financial ratios of the company would result in the rate of return,of the functional currency is US dollar than it would effect on negative side which comes under the impact of financials. If thefunctional currency is Deutsche Mark DM then it would be affecting the positive side of the financial ratios of the Machinery International. For the German subsidiary DM would be showing more results as compare to the US dollars. The rate of return in equity, assets and sales are on the higher side. These calculations are shown in the Appendix C and mentioned in the excel sheet named as “Projection of Income statement”.

The results is calculated on the basis of the such formula which are shown in the excel sheet. The formula is analyzed on basic things which measures the percent of the return according to the respective figures likewise revenue, capital and total assets and capital employed and many other items. For the functional Currencyof the subsidiary of the German is the best currency for them is Deutsche Mark as per the analysis. So company should try to go for this side which is more suitable for them and easy to translate all gain and losses..................................

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