Download NAME: FIN 456 Final Exam – Take Home Due Thursday 3/20/2014

NAME:______________________________________
FIN 456
Final Exam – Take Home
Due Thursday 3/20/2014
INSTRUCTIONS: Answer each question completely. You MUST show your work for credit. Make sure all
computations are correct & document any assumptions you make. Each item is worth 1 point unless
stated otherwise. There are 20 points total.
Use the following for problems 1-4:
Beta Inc. is trying to price an order to export to Greece. Payment is due eight months after shipping. The
appropriate cost of capital is 18% and, given the risks involved, Beta would like to factor this receivable
without recourse. The factor will charge a monthly discount of 1.5% plus a fee equal to 2% of the face
value of the receivable for the nonrecourse financing. Beta desires revenue of $3.1 million from the sale
after paying all factoring charges.
1. What is the total percent of the receivable the factor will take?
2. What is the minimum acceptable price Beta Inc. should charge the Greek customer?
3. What is the PV of the job if Beta does NOT factor the receivable? Assume they will collect
$3.1MM
4. If there is a 50/50 chance the Greek customer will not pay, should Beta factor the
receivable?
Use the following for problems 5-7:
Gamma Ltd. is trying to decide whether to shift production overseas of a component which averages
$12 per piece in costs. Offshore assembly would save about 12.6 cents per chip in labor costs, but would
take about five weeks to get the parts to customers, in contrast to one week with domestic
manufacturing. Thus, offshore production would force Gamma to carry another four weeks of inventory.
In addition, offshore production would entail combined shipping and customs duty costs of 3 cents.
Gamma's cost of capital is 15%.
5. What would be the added per-piece inventory related interest expense due to overseas
production?
6. What is the per-piece net benefit of shifting production offshore?
7. Should they offshore production?
Use the following for problems 8 & 9:
Toyota is considering locating a factory in a foreign country where they have a major market -the United States. Although labor costs would rise by ¥27,000 per car, the time in transit for the
cars (to be sold in the United States) would be reduced by 65 days. The cars sell for ¥795,000,
and Toyota's cost of capital is 15%.
8. By what amount will their cost per car change?
9. Should they locate the factory in the US?
Use the following for problems 11-13:
Epsilon Technologies sells 1,200 machines each month to a foreign affiliate at a transfer
price of $25,000 per unit. The home and foreign marginal tax rates on corporate income are
assumed to equal 35% and 40%, respectively. The transfer price can be set at any level
between $19,000 and $28,000
10. At what transfer price would corporate taxes paid be minimized?
11. What would be the tax savings if they increase the transfer price $3,000?
12. At what transfer price would corporate taxes paid be minimized if the foreign government
imposes a 15% ad valorem tax?
13. Two firms, a Japanese firm with a cost of capital of 7% and a U.S. firm with a cost of
capital of 13%, are considering a project that costs $1 million right now but yields no
returns for multiple years. Once the project becomes productive, it will yield $250,000
annually forever. How many years would the U.S. firm be willing to wait until the project
starts generating cash?
14. How many years would the Japanese firm be willing to wait until the project starts
generating cash?
15. Assume a company needs to spend 1 million euros. If the loan requires a compensating balance
of 15%, how much will they need to borrow?
16. Assume a company needs to spend 1 million euros. If the loan requires a compensating balance
of 15%, what will be the effective rate if the bank offers a 9% APR?
17. Compute the amount of additional US tax a company will owe given the following related data:
$2,000,000
Pre-tax foreign income
$640,000
Foreign tax paid
$1,360,000
Dividend from foreign subsidiary
35%
US tax rate
(all figures translated into US dollars)
Use the following in the remaining problems:
Omicron Inc., located in Northern California, has two international subsidiaries, one located in
the Ukraine, the other in Korea.
18. (2 points) If Omicron pays out 50% of its earnings from each subsidiary, how many
dollars in additional U.S. taxes are due on the foreign sourced income from the Ukraine
and Korea respectively?
Ukraine
Korea
19. If Omicron set the payout rate from the Ukraine subsidiary at 25%, how should Omicron
set the payout rate of the Korean subsidiary (approximately) to more efficiently manage
its total foreign tax bill?