The Daily Planet Has a Wholly Owned Foreign Subsidiary in Malaysia

question 106

Essay

The Daily Planet has a wholly owned foreign subsidiary in Malaysia. The subsidiary earns 25 million ringgits per year before taxes in Malaysia. The foreign income tax rate is 30%. The subsidiary repatriates the entire aftertax profits in the form of dividends to the Daily Planet. The Canadian corporate tax rate is 40% of foreign earnings before taxes.
A) Compute aftertax cash flow to the Daily Planet from this investment (in ringgits). Before tax earnings (in ringgits) $\underline{\quad\quad}$

Foreign income tax at $30 \%$$\underline{\quad\quad}$
Earnings after foreign income taxes $\underline{\quad\quad}$

Dividends repatriated $\underline{\quad\quad}$
Gross Canadian taxes at $40^{\circ} \%$ of foreign earnings before taxes $\underline{\quad\quad}$

Foreign tax credit $\underline{\quad\quad}$
Net Canadian taxes payable $\underline{\quad\quad}$
Aftertax cash flow $\underline{\quad\quad}$
B) If the exchange rate is .40 ($/ringgits), what is the after tax cash flow in dollars?
C) CCA related cash flow is 3 million ringgits per year for five years for another Daily Planet investment in Malaysia. The cash flow will earn 10% per year. After five years, it will then be translated back to dollars at an exchange rate of .47 ($/ringgit). The Daily Planet applies a 15% discount rate to foreign cash flows. What is the present value (in dollars) of the CCA related cash flow?

• A) Compute aftertax cash flow to the Daily Planet from this investment (in ringgits). Before tax earnings (in ringgits)\(\underline{\quad\quad}\)
• Foreign income tax at \( 30 \% \)\(\underline{\quad\quad}\)
• Earnings after foreign income taxes\(\underline{\quad\quad}\)
• Dividends repatriated\(\underline{\quad\quad}\)
• Gross Canadian taxes at \( 40^{\circ} \% \) of foreign earnings before taxes\(\underline{\quad\quad}\)
• Foreign tax credit\(\underline{\quad\quad}\)
• Net Canadian taxes payable\(\underline{\quad\quad}\)
• Aftertax cash flow\(\underline{\quad\quad}\)

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Definitions:

FICA Tax

A federal payroll tax that funds Social Security and Medicare, evenly split between employers and employees.

Medicare

A federal health insurance program in the United States for people aged 65 and older, and for some younger people with disabilities.

Federal Income Tax

A tax by the U.S. federal government on the annual earnings of individuals, corporations, trusts, and other legal entities.

Net Pay

The amount of money an employee receives after all deductions, such as taxes and retirement contributions, are subtracted from their gross pay.