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Wenceslas Refining Company. Privately owned Wenceslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original investment in Czech korunas (CZK) would amount to CZK240 million, or USD11,428,571 at the current exchange rate of CZK21.00 = USD1.00, all in fixed assets, which will be depreciated over ten years by the straight-line method. An additional CZK110,000,000 will be needed for working capital. Wenceslas does not believe it can forecast exchange rates so assumes they will remain fixed at the current spot rate over the entire period. For capital budgeting purposes Wenceslas assumes sale as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone (not including working capital). All free cash flow, basically net income, will be repatriated to the United States as a dividend each year. In evaluating the venture, the U.S. dollar forecasts are shown in the table Variable manufacturing costs are expected to be 50% of sales. No additional funds need be invested in the U.S. subsidiary during the period under consideration. The Czech Republic imposes no restrictions on repatriation of any funds of any sort. The Czech corporate tax rate is 19% and the United States rate is 21%. Both countries allow a tax credit for taxes paid in other countries. Wenceslas uses 13% as its cost of capital, and its objective is to maximize present value. Is the investment attractive to Wenceslas Refining? Calculate the free cash flow for year 0 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Add back depreciation Year 0 $ (11,428,571) Year 1 Year 2 Year 3 32.00 $ 8,000,000 32.40 $ 9,000,000 32.80 9,000,000 (11,000,000) (11,300,000) (11,700,000) Less additional working capital investment Sale value Free cash flows for discounting (5,238,095) $ (16,666,666) Year 1 Year 2 Year 3 alculate the free cash flow for year 1 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Year 0 EA 32.00 $ 32.40 $ 32.80 8,000,000 9,000,000 9,000,000 $ (11,000,000) (11,300,000) (11,700,000) EA GA Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting $ alculate the free cash flow for year 2 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Add back depreciation Year 0 Year 1 Year 2 Year 3 $ 32.00 $ 32.40 $ 32.80 8,000,000 9,000,000 9,000,000 (11,000,000) EA (11,300,000) (11,700,000) Less additional working capital investment Sale value Free cash flows for discounting Calculate the free cash flow for year 3 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Year 0 Year 1 Year 2 Year 3 Initial investment Unit sales price Unit demand Devenues $ 32.00 $ 8,000,000 32.40 32.80 9,000,000 9,000,000 Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting (11,000,000) (11,300,000) EA EA (11,700,000) The net present value on this investment from the project's viewpoint is $ (Round to the nearest dollar.) From the project's viewpoint, Wenceslas Refining should the investment project because its NPV is (Select from the drop-down menus.) Calculate the free cash flow for year 0 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (21%) Year 0 Year 1 Year 2 Year 3 Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ Calculate the free cash flow for year 1 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Year 0 Year 1 $ $ Tentative U.S. tax liability (21%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income $ Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ Year 2 Year 3 Calculate the free cash flow for year 2 from the parent's viewpoint below: (Round to the nearest dollar.) Darent Viewnoint ($) Voorn Voor 1 Voor 2 Voor 2 Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (21%) Year 0 Year 1 Year 2 Year 3 $ EA ᏌᏊ Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ Calculate the free cash flow for year 3 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (21%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Year 0 Year 1 Year 2 Year 3 $ $ $ $ Less credit for Czech taxes paid Additional U.S. taxes due on foreign income ( ) ) EA Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting The net present value on this investment from the parent's viewpoint is $ From the parent's viewpoint, Wenceslas Refining should $ (Round to the nearest dollar.) the investment project because its NPV is (Select from the drop-down menus.) working capital). All free cash flow, basically net income, will be repatriated to the United States as a dividend each year. In evaluating the venture, the U.S. dollar forecasts a Və re W Data table FOOL - × onsideration. The Czech k credit for taxes paid in 0 (Click on the following icon in order to copy its contents into a spreadsheet.) Assumptions Original investment (Czech korunas, CZK) 1 0 2 3 CZK240,000,000 Spot exchange rate (CZK/$) 21.00 Unit demand Unit sales price Fixed cash operating expenses 18.75 8,000,000 USD32.00 16.00 9,000,000 USD32.40 13.25 9,000,000 USD32.80 Depreciation USD11,000,000 USD11,300,000 USD1,142,857 USD1,142,857 USD11,700,000 USD1,142,857 Investment in working capital (CZK) CZK110,000,000 Earnings before taxes Print Done Wenceslas Refining Company. Privately owned Wenceslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original investment in Czech korunas (CZK) would amount to CZK240 million, or USD11,428,571 at the current exchange rate of CZK21.00 = USD1.00, all in fixed assets, which will be depreciated over ten years by the straight-line method. An additional CZK110,000,000 will be needed for working capital. Wenceslas does not believe it can forecast exchange rates so assumes they will remain fixed at the current spot rate over the entire period. For capital budgeting purposes Wenceslas assumes sale as a going concern at the end of the third year at a price, after all taxes, equal to the net book value of fixed assets alone (not including working capital). All free cash flow, basically net income, will be repatriated to the United States as a dividend each year. In evaluating the venture, the U.S. dollar forecasts are shown in the table Variable manufacturing costs are expected to be 50% of sales. No additional funds need be invested in the U.S. subsidiary during the period under consideration. The Czech Republic imposes no restrictions on repatriation of any funds of any sort. The Czech corporate tax rate is 19% and the United States rate is 21%. Both countries allow a tax credit for taxes paid in other countries. Wenceslas uses 13% as its cost of capital, and its objective is to maximize present value. Is the investment attractive to Wenceslas Refining? Calculate the free cash flow for year 0 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Add back depreciation Year 0 $ (11,428,571) Year 1 Year 2 Year 3 32.00 $ 8,000,000 32.40 $ 9,000,000 32.80 9,000,000 (11,000,000) (11,300,000) (11,700,000) Less additional working capital investment Sale value Free cash flows for discounting (5,238,095) $ (16,666,666) Year 1 Year 2 Year 3 alculate the free cash flow for year 1 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Year 0 EA 32.00 $ 32.40 $ 32.80 8,000,000 9,000,000 9,000,000 $ (11,000,000) (11,300,000) (11,700,000) EA GA Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting $ alculate the free cash flow for year 2 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Initial investment Unit sales price Unit demand Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Add back depreciation Year 0 Year 1 Year 2 Year 3 $ 32.00 $ 32.40 $ 32.80 8,000,000 9,000,000 9,000,000 (11,000,000) EA (11,300,000) (11,700,000) Less additional working capital investment Sale value Free cash flows for discounting Calculate the free cash flow for year 3 from the project's viewpoint below: (Round to the nearest dollar.) Project Viewpoint ($) Year 0 Year 1 Year 2 Year 3 Initial investment Unit sales price Unit demand Devenues $ 32.00 $ 8,000,000 32.40 32.80 9,000,000 9,000,000 Revenues Less costs of manufacturing Gross profit Less fixed cash operating expenses Less depreciation Earnings before taxes Less Czech corporate income taxes (19%) Net income Add back depreciation Less additional working capital investment Sale value Free cash flows for discounting (11,000,000) (11,300,000) EA EA (11,700,000) The net present value on this investment from the project's viewpoint is $ (Round to the nearest dollar.) From the project's viewpoint, Wenceslas Refining should the investment project because its NPV is (Select from the drop-down menus.) Calculate the free cash flow for year 0 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (21%) Year 0 Year 1 Year 2 Year 3 Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ Calculate the free cash flow for year 1 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Year 0 Year 1 $ $ Tentative U.S. tax liability (21%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income $ Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ Year 2 Year 3 Calculate the free cash flow for year 2 from the parent's viewpoint below: (Round to the nearest dollar.) Darent Viewnoint ($) Voorn Voor 1 Voor 2 Voor 2 Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (21%) Year 0 Year 1 Year 2 Year 3 $ EA ᏌᏊ Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting $ Calculate the free cash flow for year 3 from the parent's viewpoint below: (Round to the nearest dollar.) Parent Viewpoint ($) Dividends remitted to parent Add back Czech taxes deemed paid Grossed up dividend Tentative U.S. tax liability (21%) Less credit for Czech taxes paid Additional U.S. taxes due on foreign income Year 0 Year 1 Year 2 Year 3 $ $ $ $ Less credit for Czech taxes paid Additional U.S. taxes due on foreign income ( ) ) EA Repatriated cash flow Initial investment and working capital Free cash flows less additional U.S. taxes Free cash flows for discounting The net present value on this investment from the parent's viewpoint is $ From the parent's viewpoint, Wenceslas Refining should $ (Round to the nearest dollar.) the investment project because its NPV is (Select from the drop-down menus.) working capital). All free cash flow, basically net income, will be repatriated to the United States as a dividend each year. In evaluating the venture, the U.S. dollar forecasts a Və re W Data table FOOL - × onsideration. The Czech k credit for taxes paid in 0 (Click on the following icon in order to copy its contents into a spreadsheet.) Assumptions Original investment (Czech korunas, CZK) 1 0 2 3 CZK240,000,000 Spot exchange rate (CZK/$) 21.00 Unit demand Unit sales price Fixed cash operating expenses 18.75 8,000,000 USD32.00 16.00 9,000,000 USD32.40 13.25 9,000,000 USD32.80 Depreciation USD11,000,000 USD11,300,000 USD1,142,857 USD1,142,857 USD11,700,000 USD1,142,857 Investment in working capital (CZK) CZK110,000,000 Earnings before taxes Print Done
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Fundamentals of Multinational Finance
ISBN: 978-0205989751
5th edition
Authors: Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman
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