Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. Thi
ID: 2796524 • Letter: T
Question
Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 296 million Ethiopian birrs. Assume the current exchange rate is 8.9955 birrdollar or S1-S0.1 1 1 2/bim The Ethiopian tax ate on this activi y s 18%. Tax la in the United States requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as on profits earned in the United States, which is ar en y 45%, Ho ever, the United States gives a full tax credit fo fo eign taxes paid to lhe amount he US tax liability; therefore, the tax liability s S8.8 million. Tail Johnson iscorsidering lhe benefits resulting om de e rig repatriation of the earnings from the subsidiary. Under U.S. tax law, the U.S. tax iability is not incurred until the profits are brought back home. Tailor Johnson reasonably expects to defer repatriation for ten years, at which point the birr earnings will be converted into dollars at the prevailing spot ate, 10 and the tax credit for Ethiopia axes will still be convened at he exchange ate .S0. 1 /b·Taior o n nsa te ax costofde is a. Suppose the exchange rate in ten years is identical to this year's exchange rate, so S10 $0.1112/bim. What is the present value of deferring the U.S. tax liability on Tailor Johnson's Ethiopian eanings for ten years? b. How will the exchange rate in ten years affect the actual amount of the U.s. tax liability? Write an equation for the U.S. tax liability as a function of the exchange rate So a. Suppose the exchange rate in ten years is identical to this year's exchange rate, so S10 $0.1112/bi. What is the present value of deferring the U.S. tax lability on Tailor Johnson's Ethiopian earnings for ten years? The PV of deferring the U.Sby on Tailor Johnson's Ethiopian earnings for ten years is $llin (Round to three decimal places.) b. How will the exchange rate in ten years affect the actual amount of the U.S. tax liability? Write an equation for the U.S. tax liability as a function of the exchange rate S1o (Select the best choice below.) ( A. 0.18x310 × 296 million bims-$5.925 million OB. 0.45x S1o x32.9 millin birrs-$5.925 million O C. 0.18x S10 x32.9 million birrs $5.925 million D. 045xS10 x296 million birrs-S5.925 millionExplanation / Answer
Ethopia
taxes paid = 18%*296 = 53.28
tax credit = 53.28*0.1112 = 5.9247
US
taxes = 45%*296 = 133.2
tax credit = 133.2*0.1112 = 14.8118
tax liability in dollar terms = 14.8118 - 5.9247 = 8.8871
PV = 8.8871 / (1+7%)10 = 4.5178 = 4.52
b)
Option D is correct
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