International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Lexington Corp., a U.S. firm, currently has no existing business in New Zealand but is considering establishing a subsidiary there to serve the local market there. The following information has been gathered to assess this project.• The initial investment required is 25 million New Zealand dollars (NZ$).• The project will be terminated at the end of year 5, when the subsidiary will be sold. • The current spot rate of the New Zealand dollar is quoted as: USD/NZD = 0.6746 and for now it is assumed to remain constant until the end of the project. • The after-tax earnings of the subsidiary are estimated to be NZ$1,500,000; NZ$2,750,000; NZ$3,900,000; NZ$5,000,000 and NZ$6,250,000 at the end of years one, two, three, four, and five respectively.• The New Zealand government will impose a withholding tax of 15 percent on remitted earnings by the subsidiary.• All cash flows received by the subsidiary are to be sent to the parent at the end of each year. • The salvage value to be received is…
Lexington Corp., a U.S. firm, currently has no existing business in New Zealand but is considering establishing a subsidiary there to serve the local market there. The following information has been gathered to assess this project.• The initial investment required is 25 million New Zealand dollars (NZ$).• The project will be terminated at the end of year 5, when the subsidiary will be sold. • The current spot rate of the New Zealand dollar is quoted as: USD/NZD = 0.6746 and for now it is assumed to remain constant until the end of the project. • The after-tax earnings of the subsidiary are estimated to be NZ$1,500,000; NZ$2,750,000; NZ$3,900,000; NZ$5,000,000 and NZ$6,250,000 at the end of years one, two, three, four, and five respectively.• The New Zealand government will impose a withholding tax of 15 percent on remitted earnings by the subsidiary.• All cash flows received by the subsidiary are to be sent to the parent at the end of each year. • The salvage value to be received is…
B&G Co. is planning a project in France. It would lease space for one year in a shopping mall to sell expensive clothes manufactured in the U.S. The project would end in one year, when all earnings would be remitted to B&G Co. Assume that no additional corporate taxes are incurred beyond those imposed by the French government. Since B&G Co. would rent space, it would not have any long-term assets in France, and expects the salvage (terminal) value of the project to be about zero.
Assume that the project’s required rate of return is 25 percent. Also assume that the initial outlay required by the parent to fill the store with clothes is $320,000. The pretax earnings are expected to the €650,000 at the end of one year. The euro is expected to be worth $1.21 at the end of one year, when the after-tax earnings are converted to dollars and remitted to the United States. The following forms of country risk, which are independent, must be considered:
* The French economy may weaken…
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