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The Daily Planet has a wholly owned foreign subsidiary in Brazil. The subsidiary earns 25 million reals per year before taxes in Brazil. The foreign income tax rate is 30%. The subsidiary repatriates the entire after-tax profits in the form of dividends to the Daily Planet. The U.S. corporate tax rate is 40% of foreign earnings before taxes.

a) Compute after-tax cash flow to the Daily Planet from this investment (in reals). Use the table below.

Before-tax earnings (in reals) _____________ Foreign income tax at 30% _____________ Earnings after foreign income taxes _____________ Dividends repatriated _____________ Gross U.S. taxes at 40% of foreign earnings before taxes _____________ Foreign tax credit ____________ Net U.S. taxes payable _____________ After-tax cash flow _____________

b) If the exchange rate is .40 ($/reals), what is the after-tax cash flow in dollars?

c) Depreciation related cash flow is 3 million reals per year for five years for another Daily Planet investment in Brazil. The exchange rate is expected to be .47 ($/reals). The Daily Planet applies a 15% discount rate to foreign cash flows. What is the present value (in dollars) of the depreciation related cash flow?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93050586

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