Textbook Problem

Everhart Co. has substantial translation exposure in European subsidiaries. The treasurer of Everhart Co. suggests that the translation effects are not relevant because the earnings generated by the European subsidiaries are not being remitted to the U.S. parent but rather are being reinvested in Europe. Nevertheless, the vice president of finance of Everhart Co. is concerned about translation exposure because the company’s stock price strongly depends on the consolidated earnings, which themselves depend on the exchange rates at which the earnings are translated. Who is correct?