Tennessee Whiskey is a U.S. producer of alcoholic drinks. The company is evaluating opening a new...

   

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Tennessee Whiskey is a U.S. producer of alcoholic drinks. The company is evaluating opening a new distillery in Scotland for serving the British market. The project will last four years, after which the distillery will be sold. The company has estimated the following data: . Initial investment required: £80 million After-tax salvage value in year 4: £48 million .. • Annual depreciation: £8 million . British income tax rate: 26% • Fraction of after-tax income remitted to parent: 100% Withholding tax rate imposed by Britain: 0% • Stock beta: 1.2 • Bond interest rate: 8% Target capital structure: 40% equity and 60% debt . U.S. tax rate: 21% Treasury bond yield: 2% Expected return on the S&P 500: 5% The company expects the following revenue, costs, depreciation and exchange rates: Year 0 Revenue (€ million) Costs (€ million) Depreciation (€ million) Exchange rate (per £) $1.37 Year 1 £80 €64 £8 $1.33 Year 2 £80 €64 £8 $1.29 Year 3 €80 £64 €8 $1.25 What is the free cash flow to the subsidiary in year 3, including the after-tax salvage value of the distillery (in £ million)? 0+ decimals What is the free cash flow to the parent in year 3 (in $ million)? 0+ decimals What is the NPV of the project (in 5 million)? 1+ decimals Tennessee Whiskey is a U.S. producer of alcoholic drinks. The company is evaluating opening a new distillery in Scotland for serving the British market. The project will last four years, after which the distillery will be sold. The company has estimated the following data: . Initial investment required: £80 million After-tax salvage value in year 4: £48 million .. • Annual depreciation: £8 million . British income tax rate: 26% • Fraction of after-tax income remitted to parent: 100% Withholding tax rate imposed by Britain: 0% • Stock beta: 1.2 • Bond interest rate: 8% Target capital structure: 40% equity and 60% debt . U.S. tax rate: 21% Treasury bond yield: 2% Expected return on the S&P 500: 5% The company expects the following revenue, costs, depreciation and exchange rates: Year 0 Revenue (€ million) Costs (€ million) Depreciation (€ million) Exchange rate (per £) $1.37 Year 1 £80 €64 £8 $1.33 Year 2 £80 €64 £8 $1.29 Year 3 €80 £64 €8 $1.25 What is the free cash flow to the subsidiary in year 3, including the after-tax salvage value of the distillery (in £ million)? 0+ decimals What is the free cash flow to the parent in year 3 (in $ million)? 0+ decimals What is the NPV of the project (in 5 million)? 1+ decimals

Answer rating: 100% (QA)

Answer To calculate the free cash flow to the subsidiary in year 3 including the aftertax salvage value of the distillery we need to consider the revenue costs depreciation exchange rate and salvage v... View the full answer