QUESTION 84 For the next 2 questions suppose the following data holds: In 2017, Green Valley Exporters USA had $100,000 of before-tax foreign income. The host country has a corporate income tax rate of 20% and the U.S. has a corporate income tax rate of 35%. If the U.S. treated the taxes paid on income earned in the host country as a tax-deductible expense, then Green Valley's total U.S. corporate tax on the foreign earnings would be: $12,000. $15,000. $22,500. $28,000. $32,500. QUESTION 85 Continuation of the above question: If the U.S. treated the taxes paid on income earned in the host country as a tax-credit, then Green Valley's total U.S. corporate tax on the foreign earnings would be: $12,000. $15,000. O $22,500. $28,000. $32,500. QUESTION 74 For the next 4 questions suppose the following data holds: Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 2.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00%. What is the all-in-cost (AIC, i.e., the internal rate of return) of the Polaris loan including the LIBOR rate, fixed spread and upfront fee? 7.11% 7.33% 7.60% 7.84% 8.12% QUESTION 75 If the LIBOR rate jumps to 5.00% after the first year, what will be the AIC for Polaris for the entire loan? 7.11% 7.33% 7.60% O 7.84% O 8.12% QUESTION 76 Polaris buys the forward rate agreement (FRA) from an insurance company. According to the contract, if LIBOR rises above 4%, the initial forecast, the insurance company would pay to Polaris at the end of each year the difference between the LIBOR and 4%. In the opposite case, i.e., if LIBOR falls below 4%, Polaris would pay the difference between 4% and real LIBOR to the insurance company. The purchase of the forward rate agreement will cost $200,000, paid at the time of the initial loan. Calculate the all-in-cost (AIC) of the loan based on the assumption that the LIBOR rate jumps to 5.00% after the first year. 7.11% O 7.33% 7.60% 7.84% O 8.12% QUESTION 77 Suppose Polaris decides to engage in an interest rate swap in which Polaris would pay fixed 5% and receive LIBOR on a notional value of $50 million. Calculate the all-in-cost (AIC) of the loan with the interest rate swap. 7.11% 7.33% O 7.60% 7.84% O 8.12% QUESTION 78 For the next 5 questions suppose the following data holds: Carlton Corporation entered into a three-year cross currency interest rate swap to receive U.S. dollars and pay Swiss francs. The notional principal is $10 million. The 3-year swap rates are quoted in the next table: Swiss Franc Bid 2.51% Ask 2.57% U.S. dollar Bid Ask 5.72% 5.79% Assume the current spot exchange rate is S = SF1.5/$. How much U.S. dollars will Carlton receive in year 1 as a result of the currency swap? $257,000 O $572,000 $575,500 $579,000 QUESTION 79 How much Swiss francs will Carlton pay in year 1 as a result of the currency swap? SF385,500 SF422,500 SF433.500 SF475,000 QUESTION 80 Carlton, however, decided to unwind the swap after one year - thereby having two years left on the settlement costs of unwinding the swap after one year. Assume the current spot exchange rate when the swap is terminated one year later is S-SF1.4650/$, and the Swiss interest rate is 2.00%, and US interest rate is 5.5% at that time. What is the present value of the U.S. dollar cash flows Carlton could have received if the swap contract were not terminated? O $7,567,154 O $8,367,315 $9,343,571 O $10,040,619 QUESTION 81 In the above question where the currency swap contract was terminated after one year, what is the present value of the Swiss franc cash flows Carlton would have paid if the swap contract were not terminated? Assume again the current spot exchange rate when the swap is terminated one year later is S = SF1.4650/$, and the Swiss interest rate is 2.00 %, and US interest rate is 5.5% at that time. SF1,485,235 SF15,166,003 O SF15,657,612 SF16,656,145 QUESTION 82 In the above, what is the settlement payment Carlton has to make if the current exchange rate of S = SF1.4650/$. O-$311,602 O-$234,861 -$127,435 $123,615 QUESTION 83 In September 2019, a U.S. investor chooses to invest $500,000 in German equity securities at a then current spot rate of $1.15/euro. The average purchase price was 60/share. At the end of the year the investor sells his stock that now has an average price per share of 58. What is the investor's average rate of return after converting the stock back into dollars? At the end of one year the spot rate is $1.25/euro. O-2.05% O 1.02% 3.23% 4.23% 5.07% QUESTION 86 For the next 4 questions suppose the following data holds: Baltimore Tile Company (U.S.) is considering investing Rs60,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After three years the subsidiary would be sold to Indian investors for Rs70,000,000. A pro forma income statement for the Indian operation is shown below. Sales revenue Rs 40,000,000 Less cash operating expenses -17,000,000 Less depreciation expenses -5,000,000 Earnings before interest and taxes 18,000,000 Less Indian taxes at 50% -9,000,000 9,000,000 Net income The initial investment will be made on December 31, 2019, and cash flows will occur on December 31st of each succeeding year. Annual cash dividends to Baltimore Tile from India will equal 75% of accounting net income. The U.S. corporate tax rate is 40% and the Indian corporate tax rate is 50%. In addition to the corporate tax of 50%, Indian government is imposing 10% withholding tax on dividends repatriated to Baltimore Tile. Because the Indian tax rate is greater than the U.S. tax rate, annual dividends paid to Baltimore Tile will not be subject to additional taxes in the United States. There are no capital gains taxes on the final sale. Baltimore Tile uses a weighted average cost of capital of 14% on domestic investments, but will add 6 percentage points for the Indian investment because of perceived greater risk. Baltimore Tile forecasts the rupee/dollar exchange rate for December 31st on the next four years to be as follows: End-of-year Exchange Rate 2019 Rs50/$ 2020 Rs54/$ 2021 Rs58/$ Rs62/$ 2022 What is the net present value (in rupee) of the India project from the project viewpoint? Rs 7.75m Rs 8.25m O Rs 9.3m Rs 10.0m O Rs 12.5m QUESTION 87 What is the internal rate of return of the India project from the project viewpoint? 10.81% 19.63% O 24.45% 27.60% 33.33% QUESTION 88 What is the net present value (in U.S. dollar) of the India project from the parent's viewpoint? - Rs 228,547 O - Rs 356,318 Rs 571,289 Rs 1,231,657 O Rs 1,454,679 QUESTION 89 What is the internal rate of return of the India project from the parent's viewpoint? 10.81% 19.63% O 24.45% O 27.60% O 33.33%