The Daily Planet Has a Wholly Owned Foreign Subsidiary in Brazil

question 97

Essay

The Daily Planet has a wholly owned foreign subsidiary in Brazil. The subsidiary earns 30 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 following table.
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 .56 ($/reals), what is the after-tax cash flow in dollars?
c) Depreciation related cash flow is 2 million reals per year for five years for another Daily Planet investment in Brazil. The exchange rate is expected to be .59 ($/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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Definitions:

Utility Ratio

The comparison of the utility (satisfaction) received from one choice relative to another.

Capital Goods

Physical assets used by businesses to produce goods and services, such as machinery, buildings, and equipment.

Investment

In economics, spending for the production and accumulation of capital and additions to inventories.

Depreciation

The process of allocating the cost of a tangible asset over its useful life, representing how much of an asset's value has been used up over time.