7.2

Finisterra, S.A. Finisterra, S.A., located in the state of Baja California, Mexico, manufactures frozen Mexican food which enjoys a large following in the U.S. states of California and Arizona to the north. In order to be closer to its U.S. market, Finisterra is considering moving some of its manufacturing operations to southern California. Operations in California would begin in year 1 for three years and have the following attributes: .The operations in California will pay 77% of its accounting profit to Finisterra as an annual cash dividend. Mexican taxes are calculated on grossed up dividends from foreign countries, with a credit for host-country taxes already paid. The corporate income tax rate in U.S. is 30% (the tax rate in Mexico is lower than the rate in the U.S.), the current spot exchange rate is Ps9.00/$, and the exchange rates for the next three years will be Ps10.00/$, Ps11.00/$, and Ps12.00/$, respectively. Assume the after-tax dividends received by the parent in years 4 through infinity will be the same as the dividends received in year 3. What is the maximum U.S. dollar price Finisterra should offer today for the investment?

Table:

Assumptions

Value

Sales price per unit, year 1 (US$)

$6.00

Sales price increase, per year

2.00%

Initial sales volume, year 1, units

1,200,000

Sales volume increase, per year

1.00%

Production costs per unit, year 1

$4.00

Production cost per unit increase, per year

3.00%

General and administrative expenses per year

$140,000

Depreciation expenses per year

$70,000

Finisterra's WACC (pesos)

15.80%

Terminal value discount rate

19.30%

Calculate the cash flow in year 1 below:(Round to the nearest whole number. The sales price and cost per unit must be rounded to the nearest cent.)