PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 19.A, Problem 1Q
The U.S. government has settled a dispute with your company for $16 million. The government is committed to pay this amount in exactly 12 months. However, your company will have to pay tax on the award at a marginal tax rate of 21%. What is the award worth? The one-year Treasury rate is 5.5%.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Spherical Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25%, and Spherical's marginal corporate tax rate is 35% a What are the annual CCA deductions associated with this equipment for the first five years? b. What are the annual CCA tax shields for the first five years? c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 10% per year? d. What is the present value of all the CCA tax shields, assuming the equipment is never sold and the appropriate discount rate is 10% per year? e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years?
Spherical Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25% and Spherical's marginal corporate tax rate is 32%. a. What are the annual CCA deductions associated with this equipment for the first five years? b. What are the annual CCA tax shields for the first five years? c. What is the present value of the first five CCA tax shields if the appropriate discount rate is 12% per year? d. What is the present value of all the CCA tax shields assuming the equiment is never sold and the appropriate discount rate is 12% per year? e. How might your answer to part (d) change if Spherical anticipates that its marginal corporate tax rate will increase substantially over the next five years?
Mississippi Company borrows ¥80,000,000 at a time when the exchange rate is 110 ¥/$. Principal is to be repaid two years from now, and interest is for the yen bond is 4% per annum, paid annually in yen. Suppose the yen is expected to depreciate relative to the dollar to 120 ¥/$ in one year, and 125¥/$ in two years. Under these circumstances, what would be the effective dollar cost of this loan for Mississippi Company? Please enter your answer as % -- e.g. if your answer is 2.34% type in 2.34.
Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - You are considering a five-year lease of office...Ch. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - WACC Whispering Pines Inc. is all-equity-financed....Ch. 19 - WACC Table 19.3 shows a book balance sheet for the...Ch. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - Prob. 8PS
Ch. 19 - WACC Nevada Hydro is 40% debt-financed and has a...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - APV Consider a project lasting one year only. The...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - Prob. 17PSCh. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 20PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 26PSCh. 19 - Prob. 27PS
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Intelledex, Inc., a robotics manufacturer based in Corvallis, Oregon, has won a bid to deliver robotics equipment to a Swiss automobile company. The bid is SF8 million. Intelledex will receive the entire SF8 million upon delivery of the equipment six months from now. The present spot rate for the Swiss franc is SF8.000/$, and the six-month forward rate is SF8.2000/$. Intelledex can borrow U.S. dollars at 12% per annum or Swiss francs at 17% per annum. Its opportunity cost of capital is 14% per annum. 1. Explain the various ways in which Intelledex could cover its foreign exchangeexposure. 2. What would the bread-even opportunity cost of capital have to be for them to beindifferent between the various alternatives?3. Explain how economic exposure might change the expected profitability of this order.arrow_forwardMTR bank has agreed to provide a lockbox system to Sexy Inc. for a fixed fee of P50, 000 per year and a rate of P.50 for each payment processed by the bank. On average, Sexy Inc. receives 50 payments per day, each averaging P20,000. With the lockbox system, the company’s collection float will decrease by two days. The annual interest rate on money market securities is 6%. If Sexy Inc. makes use of the lockbox system, what would be the net benefit to the company? Use 365 days in a year. A. P50,000 B. P59,125 C. P60,875 D. P120,000arrow_forwardKristo Asafo Tools Ltd is filling an order from a Korean industrial company for machinery worth 160,000,000 Won. The export sale is denominated in Korean Won and is on a one-year open account basis. The opportunity cost of funds for Kristo Asafo Tools Ltd is 8% The Current spot rate between Won and Dollars is 800 Won/$. The forward Won sells at a discount of 12% per annum, but the finance staff of Kristo Asafo Tools Believes that the Won will drop only 9% in value over the next year. Kristo Asafo Tools Ltd faces the following choices This question compares the cost of a money market hedge with a forward hedge, and considers both alternatives against the possibility of remaining unhedged. a) Wait one year to receive the won amount and exchange Won for dollars at that time b) Sell the Won proceeds of the sale forward today c) Borrow Won from a Seoul bond at 20% per annum against the expected future receipt of the Korean importer’s payment d) What do you recommend and why?arrow_forward
- Smart banking corp can borrow $5 million at 6 percent annualized.it can use the proceeds to invest in Canadian dollars at 9 percent annualized over a 6-day period. The canadian dollar is worth $.95 and is expected to be worth $.96 in 6 days. Based on this information, should smart banking corp. Borrow U.S dollars and invest in Canadian dollars? What would be the gain or loss in U.S dollars?arrow_forwardThe CMOS Electronics Company is considering a capital investment of 50,000,000 pesos in an assembly plant located in a foreign country. Currency is expressed in pesos, and the exchange rate is now 100 pesos per U.S. dollar. The country has followed a policy of devaluing its currency against the dollar by 10% per year to build up its export business to the United States. This means that each year the number of pesos exchanged for a dollar increases by 10% (fe = 10%), so in two years (1.10)2(100) = 121 pesos would be traded for one dollar. Labor is quite inexpensive in this country, so management of CMOS Electronics feels that the proposed plant will produce the following rather attractive ATCF, stated in pesos: If CMOS Electronics requires a 15% IRR per year, after taxes, in U.S. dollars (ius) on its foreign investments, should this assembly plant be approved? Assume that there are no unusual risks of nationalization of foreigninvestments in this country.arrow_forwardPharma, Inc, manufactures and distributes pharmaceutical products. It is considering buying the rights to make and sell a new drug created by a drug development laboratory A&B Ltd., which develops new drugs but generally lets others manufacture and distribute them. A&B Ltd. Will send the rights to the products to Pharma for 1 billion. The net after-tax cash flow generated by the drug is expected to be P150 million in 1 year and to grow at 20% per year for the following four years, at which point (in year 5) the remaining value (or terminal value) of the drug is expected to be P500 million. Suppose the risk-free rate of return is 4% and Pharma has determined that 8% is the appropriate opportunity cost of funds for this project. Pharma needs to decide whether to go ahead and purchase the rights to the new drug. Should the company go ahead with the purchase? Why?arrow_forward
- Pharma, Inc, manufactures and distributes pharmaceutical products. It is considering buying the rights to make and sell a new drug created by a drug development laboratory A&B Ltd., which develops new drugs but generally lets others manufacture and distribute them. A&B Ltd. Will send the rights to the products to Pharma for 1 billion. The net after-tax cash flow generated by the drug is expected to be P150 million in 1 year and to grow at 20% per year for the following four years, at which point (in year 5) the remaining value (or terminal value) of the drug is expected to be P500 million. Suppose the risk-free rate of return is 4% and Pharma has determined that 8% is the appropriate opportunity cost of funds for this project. Pharma needs to decide whether to go ahead and purchase the rights to the new drug. Should the company go ahead with the purchase? Why? Pease show formula and solution. Not in spreadsheet calculationarrow_forwardAshGold Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows:Present spot rate:C$ 1.4000/US$Six-month forward rate:C$ 1.4200/US$Canadian six-month interest rate:13% per annumU.S. six-month interest rate10% per annumThe financial manager’s own analysis suggests that in six months the following spot rates can be expected:Highest expected rate:C$1.4000/US$Most likely rate:C$1.4300/US$Lowest expected rate:C$1.4500/US$Ashgold Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Ashgold’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or disadvantages of each?arrow_forwardAshGold Products is completing a new factory building in Canada and must make a final construction payment of C$28,000,000 in six months. Foreign exchange and interest rate quotations are as follows:Present spot rate:C$ 1.4000/US$Six-month forward rate:C$ 1.4200/US$Canadian six-month interest rate:13% per annumU.S. six-month interest rate10% per annumThe financial manager’s own analysis suggests that in six months the following spot rates can be expected:Highest expected rate:C$1.4000/US$Most likely rate:C$1.4300/US$Lowest expected rate:C$1.4500/US$Ashgold Products does not presently have any excess dollar cash balances. However, it expects to obtain adequate cash from an income tax refund due in six months. Ashgold’s weighted average cost of capital is 20% per annum. What alternatives are available for making payment, and what are the advantages or disadvantages of each? (2) A key issue facing financial executives of multinational firms is exposure to exchange rate changes.a. Define…arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
How to (Legally) Never Pay Taxes Again; Author: Next Level Life;https://www.youtube.com/watch?v=q63F1pBrUHA;License: Standard Youtube License