Question #8

Fixed asset turnover is calculated as sales / average fixed assets. The numerator is translated at the average rate during the year ($0.80/SF) while fixed assets are translated at historical rate ($0.77/SF). Hence the reporting currency numerator will be higher resulting in a higher fixed-asset turnover ratio. (Module 10.4, LOS 10.e) Walter Jameson, CFA®, is an analyst for Continental Corp., a global investment bank. Jameson has been assigned coverage of Wasson Brothers (WB), a large U.S. based conglomerate with many subsidiaries in both the U.S. and abroad. Jameson has completed his review of the firm's U.S. operations, but his research report is due at the end of the week and he has yet to assess the impact of Wasson's foreign subsidiaries on his earnings model. One of WB's wholly-owned foreign subsidiaries, Kasamatsu Industries, is based in Japan and manufactures a hugely successful line of trading cards, toys, and other related products. All of Kasamatsu's operations and sales take place in Japan, and the corresponding transactions are denominated in Japanese yen. Additionally, Kasamatsu's books and records are all maintained in yen. WB reports its earnings in U.S. dollars. The history of the exchange rate between the dollar and the yen over the last two years is presented in the following table. Figures are presented in yen/$. Yen/Dollar Exchange Rate December 31, 2002 150 December 31, 2001 130 2002 Average 140 2001 Average 120 Exchange rate on date that 2002 dividends were declared (payable to Wasson Brothers) 145 Exchange rate on date of stock issue and acquisition of fixed assets 100 Kasamatsu Industries Financial Data (12/31/02) Yen (in thousands) Exchange Rate U.S. Dollars (in thousands) Sales 700,000 COGS 280,000 Depreciation 126,000 SG & A 77,000 Income Tax Expense 98,000 Net Income 119,000 2001 Retained Earnings 0 Dividends 58,000 2002 Retained Earnings 61,000 Current Assets 50,000 Fixed Assets 486,000 Current Liabilities 46,000 Long Term Debt 254,000 Capital Stock 175,000 Accumulated Translation Adjustment