Reference no: EM13555427

Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan their rate will be 9 percent. By how much will their earnings after tax change if they choose the more aggressive financing plan instead of the more conservative?
A.$10,800
B.($10,000)
C.($6,000)
D.$6,000

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°o                        ________________

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?