Deutchlampwerks [DLW] g.m.b. manufactures a variety of small light bulbs that are used as original equipment [OEM] and replacement parts for automobiles and light trucks. The German firm has operated exclusively out a single large plant site located in Stuttgart until 2000. Proximity to a Daimler-Benz and Porsche automobile assembly plant, combined with modern production facility were major factors contributing to the success of DLW. But concerns over US trade policy caused WV, BMV, and Mercedes to build auto assembly plants in the USA and DLW followed them; building a plant outside of Louisville, KY.

The DLW wholly-owned subsidiary has $1.5B in assets, $0.5B in current liabilities, $0.6B in long-term debt, and $0.4B in equity. For 2022, DLW will have sales of $2.0B and after-tax profits of $0.2B. It has been DLW policy to repatriate all after-tax profits as earned, quarter-to-quarter, from the US to Germany (now that it has built up an appropriate amount of equity in its subsidiary).

On 1/1/22 the Euro was worth was $1.1374, on 11/15/22 the Euro was worth $1.0330. In late October, the European Central Bank raised its key benchmark interest for the 3^rd time this year to 1.50%, and in early November the Federal Reserve Board announced that it was raising its key benchmark interest rate to 3.75%. In October, the EU annual rate of inflation averaged 10.9% (this was the rate in Germany) with energy costs still the main driver (+40.7% over last year). In the same month, the rate of inflation measured by the Consumer Price Index was 7.7% (energy costs up 17.6%).

[1] How has the change in the Euro-US Dollar exchange impacted the Euro value of profits earned by DLW in the United States? How has the change impacted the value of DLW equity in the subsidiary?

[2] What would Interest Rate Parity (IRP) theory predict the value of the Euro to be (in $) in one year?

[3] What would Purchasing Power Parity (PPP) theory predict the value of the Euro to be (in $) in 1 year?

[4] Instead or returning after-tax profits to Germany in 2023, should DLW pay down its US long-term debt (explain why)?