ASSET AND LIABILITY MANAGEMENT

Long term Asset and Liability Management



Long term Asset and Liability Management

Answer 1:

Gandor's Cost of Capital:

Re= 18 %

Rd= 13.8 %

E/V=40 %

D/V= 60 %

Tax Rate = 30 %

WACC = E/V x Re + D/V x Rd x (1-tax rate)

WACC = 0.40 x 0.18 + 0.60 x 0.138 x (1-0.30)

= 0.072 + 0.0828 x 0.70= 0.072 + 0.0579

= 0.1299

WACC = 12.99 % = 13 %

Gandor's Required Rate of Return

Gandor applied a premium of 4 % to the cost of capital to derive its required rate of return on international joint ventures. Therefore, the required rate of return after calculating the cost of capital is 17 %.

Answer 2:

Scenario 1: Based On Original Assumptions Probability Distribution = 60%

Year 1

Year 2

Year 3

Total Profits in CHY

60000000

80000000

100000000

Profits Allocated to Gandor (50 % of Total)

30000000

40000000

50000000

Corporate Income Taxes (20% by Chinese Government)

6000000

8000000

10000000

Profits After Tax

24000000

32000000

40000000

Gandor's Dollar Profits (Exchange rate CHY 1 = $ 0.20

4800000

6400000

8000000

U.S. Taxes (10 %)

480000

640000

800000

Profit After U.S. Taxes

4320000

5760000

7200000

Cash Flows from Joint Venture

4320000

5760000

7200000

Discount rate

17%

Year

0

1

2

3

Net Cash flow

(12,000,000.00)

4320000

5760000

7200000

Discount Factor

1.17

1.37

1.60

Discounted CF

(12,000,000)

3,692,307.69

4,207,758.05

4,495,468.01

NPV =

$395,533.753

Scenario 2: Based On Increase in Corporate Income Tax by Chinese Government Probability Distribution = 20%

Year 1

Year 2

Year 3

Total Profits in CHY

60000000

80000000

100000000

Profits Allocated to Gandor (50 % of Total)

30000000

40000000

50000000

Corporate Income Taxes (40% by Chinese Government)

12000000

16000000

20000000

Profits After Tax

18000000

24000000

30000000

Gandor's Dollar Profits (Exchange rate CHY 1 = $ 0.20

3600000

4800000

6000000

U.S. Taxes (0 %)

0

0

0

Profit After U.S. Taxes

3600000

4800000

6000000

Cash Flows from Joint Venture

3600000

4800000

6000000

Discount rate

17%

Year

0

1

2

3

Net Cash flow

(12,000,000.00)

3600000

4800000

6000000

Discount Factor

1.17

1.37

1.60

Discounted CF

(12,000,000)

3,076,923.08

3,506,465.04

3,746,223.34

NPV =

($1,670,388.540)

Scenario 3: Based on the Imposition of A Withholding Tax by Chinese Government Probability Distribution = 20%

Year 1

Year 2

Year 3

Total Profits in CHY

60000000

80000000

100000000

Profits Allocated to Gandor (50 % of Total)

30000000

40000000

50000000

Corporate Income Taxes (20% by Chinese Government)

6000000

8000000

10000000

Profits After Tax

24000000

32000000

40000000

Withholding Tax (10%)

2400000

3200000

4000000

Profits

21600000

28800000

36000000

Gandor's Dollar Profits (Exchange rate CHY 1 = $ 0.20

4320000

5760000

7200000

U.S. Taxes (10 %)

432000

576000

720000

Profit After U.S. Taxes

3888000

5184000

6480000

Cash Flows from Joint Venture

3888000

5184000

6480000

Discount rate

17%

Year

0

1

2

3

Net ...