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:

Freelancer

An individual who works as an independent contractor to provide services to multiple clients, often operating their own small business.

Free Agent

A professional who operates independently, often contracting their services to different organizations rather than being permanently employed by one.

Multiple Employers

Engaging multiple employers refers to a work arrangement where an individual simultaneously holds employment positions with more than one employer, often to diversify income sources or gain varied work experiences.

Flextime

Flexible working hours in which employees customize their own work hours within limits established by management.