Reference no: EM132909651

To kick start its economy, Country X is offering subsidised loans to Australian companies willing to set up operations there. The loan is $25 million at 3% when the market interest rate for such an investment is 8%. The loan principal is to be paid off in five equal annual instalments.

(i) What is the before tax value of this interest subsidy?

(ii) The projected before-tax income from the plant in Country X is $1 million annually with the first set of cashflows arriving at the end of Year

1. The corporate tax rate in Country X is 25% and it also has a 20% dividend withholding tax. Country X, confers a (corporate) tax holiday on the plant's income for the first five years. If the Australian firm remits all the dividends that it receives back to Australia, how much is the (corporate) tax holiday, in the form of tax credits, worth to the firm?

Note: The Australian corporate tax rate is 30%. Country X's tax rules do not allow for a tax holiday on dividends.