HomeWeb UK is a subsidiary of HomeWeb USA. The company manufactures home securit
ID: 2750004 • Letter: H
Question
HomeWeb UK is a subsidiary of HomeWeb USA. The company manufactures home security system. HomeWeb UK has forecasted the sales and cost figures for the next three years. They are as follows:
Sales Volume = 100,000 units
Sales Price = £100 per unit
Cost = £60 per unit
UK Corporate tax rate = 25%
Spot Exchange rate = $1.50/£
Forward rate =$1.55/£
Operating Expenses = 15 percent of Sales Revenue
Depreciation = £500,000
Cost of Capital = 7 percent
Investing rate (UK) = 3 percent
Investing rate (US) = 2.5 percent
What is the free cash flow in US$?
Question 34 options:
$1,310,533.65
$3,000,000
$1,333,333.33
$1,290,322.58
$1,310,533.65
$3,000,000
$1,333,333.33
$1,290,322.58
Explanation / Answer
Calculation of free cash flows in $
CFBT = 100000(100-60-100x15%)
= pounds2500000
Tax = 2500000x25% = pounds625000
Tax savings on depreciation = pounds500000x25% = 125000
CFAT = 2500000-625000+125000
= Pounds2000000
Spot exchange rate = $1.50/Pounds
Free cash flows in $ = pounds2000000/pounds1 x $1.50
= $3000000
Therefor answer will be second option i.e, $3000000
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