Grand Canyon FIn450 module 8 assignment

19-1

P19–1 Tax credits A U.S.-based MNC has a foreign subsidiary that earns $250,000 before

local taxes, with all the after-tax funds to be available to the parent in the form of

dividends. The applicable taxes consist of a 33% foreign income tax rate, a foreign

dividend withholding tax rate of 9%, and a U.S. tax rate of 34%. Calculate the net

funds available to the parent MNC if:

a. Foreign taxes can be applied as a credit against the MNC’s U.S. tax liability.

b. No tax credits are allowed.

19-3

Exchange rates Fred Nappa is planning to take a wine-tasting tour through Italy

this summer. The tour will cost 2,750 euros (€) and includes transportation, hotels,

and a guide. Fred estimates that round-trip airfare from his home in North Carolina

to Rome, Italy, will be $1,490; he also will incur another $300 (U.S.) in incidental

travel expenses. Fred estimates the cost of meals in Italy to be about €500, and he

will take an additional $1,000 to cover miscellaneous expenditures. Currently, the

exchange rate is US$1.3411/€1.00 (or €.7456/US$1.00).

a. Determine the total dollar cost of the trip to Italy.

b. Determine the amount of euros (€) Fred will need to cover meals and miscellaneous

expenditures.

19-5

P19–5 Euromarket investment and fund raising A U.S.-based multinational company has

two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan

(local currency, yen, ¥). Forecasts of business operations indicate the following

short-term financing position for each subsidiary (in equivalent U.S. dollars):

Mexico: $80 million excess cash to be invested (lent)

Japan: $60 million funds to be raised (borrowed)

The management gathered the following data:

Currency

Item US$ MP ¥

Spot exchange rates MP 11.60/US$ ¥108.25/US$

Forecast percent change -3.0% +1.5%

Interest rates

Nominal

Euromarket 4.00% 6.20% 2.00%

Domestic 3.75% 5.90% 2.15%

Effective

Euromarket ——— ——— ———

Domestic ——— ——— ———

Determine the effective interest rates for all three currencies in both the Euromarket

and the domestic market, and then indicate where the funds should be invested and

raised. (Note: Assume that because of local regulations, a subsidiary is not permitted

to use the domestic market of any other subsidiary.)