Part 1

Information for Year 1, Year 2, and Year 3 for the Andean branch of Powell Corporation is presented in the following table. The corporate tax rate in the Andean Republic changes drastically year-to-year. The U.S. corporate tax rate each year is 21%.

1. For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the United States (fill in the table with your answer)? Show your work.
   1. $15,70, $21,000, and $21,000
   2. $11,250, $20,000, and $22,000
   3. $75,000, $100,000, and $100,000
   4. $11,250, $20,000, and $21,000
   5. $15,70, $21,000, and $22,000
      
2. For Year 2, what is the net U.S. tax liability? Show your work.
   1. $22,000
   2. $0
   3. $1,000
   4. $2,000
   5. $21,000

3. For Year 3, what is the net U.S. tax liability?   Show your work.
   1. $22,000
   2. $0
   3. $1,000
   4. $2,000
   5. $21,000

4. In Year 3, how much excess foreign tax credit can Powell carry back?
   Show your work.
   1. $22,000
   2. $0
   3. $1,000
   4. $2,000
   5. $21,000

Suppose that you will receive $5,000 in year 1, $5,000 in year 2, $5,000 in year 3 and $7,000 in year 5. And somehow you know that the present value for the whole cash stream is $23,071.30. At a 7% discount rate, the cash flow received in year 4 will be ــــــــــــــــــــــــــــ.

Select one:

a. $6,500

b. $7,200

c. $7,000

d. $6,800

Suppose that you will receive $5,000 in year 1, $5,000 in year 2, $5,000 in year 3 and $7,000 in year 5. And somehow you know that the present value for the whole cash stream is $23,071.30. At a 7% discount rate, the cash flow received in year 4 will be ــــــــــــــــــــــــــــ.

Select one:

a. $7,000

b. $7,200

c. $6,500

d. $6,800

Information for Year 1, Year 2, and Year 3 for the Alpinian branch of Rawl Corporation is presented in the following table. The corporate tax rate in the Alpinian Republic in Year 1 was 11 percent. In Year 2, the Alpinian Republic increased its corporate income tax rate to 15 percent. In Year 3, the Alpinian Republic increased its corporate tax rate to 22 percent. The U.S. corporate tax rate in each year is 21 percent.

For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the United States?

1. You plan to deposit $1,000 in Year 1, $1,200 in Year 2 and $2,000 in year 4 in your savings account. You think that you can earn 6% per year. How much will you have in your account in Year 6?

2. Bank X promises to pay you $5,200 per year for 8 years, whereas Bank Y offers to pay you $7,300 per year for 5 years.

1. Which of these cash flow streams has the higher present value (PV) if the discount rate is 5 percent?

(Hint: compare the PVs of annuity X ($5,200 per year for 8 years) with annuity B ($7,300 per year for 5 years)

2. Which one should you choose between Bank X and Bank Y?

3. Today, Dinero Bank offers you a $60,000, five-year term loan at 7.5 percent annual interest (APR). What will your annual loan payment be? (Hint: Find PMT)

4. You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 8.5 percent? (Hint: annuity due)

5. The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 4.3 percent, how much will you pay for the policy? (Hint: Find PV of perpetuity)

6. Find the EAR in each of the following cases:
   1. APR 9% with quarterly compounding

2. APR 18% with monthly compounding

3. APR 14% with semi-annual compounding

7. Find the APR, or stated rate, in each of the following cases:
   1. EAR 11.5%, semi-annual compounding

2. EAR 12% with quarterly compounding

Chapter 7

8. Consider a 3-year bond with a face value of $1,000 that has a coupon rate of 7%, with semi-annual payments.
   1. What is the dollar amount of each coupon from this bond?

2. How many times of coupon payments will be made to the maturity?

9. Assume that a bond will make coupon payments every six months as shown on the following timeline:

1. What is the coupon rate (in percent)?

9. 2. What is the face value?
10. What is the bond price of $1,000 bond with 6% coupon rate, annual coupons, and 2 years to maturity if the YTM is 8%?

11. What is the bond price of $1,000 bond with 6% coupon rate, semi-annual coupons, and 2 years to maturity if the YTM is 8%?

12. Suppose a 10-year, $1000 bond with an 8% coupon rate and annual coupons is sold for $1034.74.
    1. What is the bond’s YTM?

2. Is the YTM higher or lower than the coupon rate?

Project Wind Power

Project Hydroelectric power

1. If the interest rate is 3%, which project would you choose and why? Show your work using excel (15 points)

1. If the interest rate is 15%, which project would you choose and why? Show your work using excel (15 points)

2. Initial Outlay -$5,000 Year 1 $3,000 Year 2 $3,500 Year 3 $3,200 Year 4 $2,800 Year 5 $2,500

a. What is the PI if the discount rate is 20%? Round to the second decimal place. Type only numbers without any unit ($, %, etc.)

b. What is the NPV if the discount rate is 20%? Round to the second decimal place. Type only numbers without any unit ($, %, etc.) If there are multiple answers, then type NA.

c. What is the IRR if the discount rate is 20%? Answer in the percent format. Round to the hundredth decimal place. Type only numbers without any unit ($, %, etc.)

d. What is the EAA if the discount rate is 20%? Round to the penny. Type only numbers without any unit ($, %, etc.)

The 1-year, 2-year, 3-year and 4-year zero rates are 2%, 3%, 4% and 5% per annum (APR) with quarterly compounding/payment.

a) What are the corresponding per annum zero rates with continuous compounding?

b) What is today’s forward rate for an investment initiated one year from today and maturing 3 years from today?  (Give your answer per annum with continuous compounding)?

c) What is today’s forward rate for a one-year investment initiated three years from today?  (Give your answer per annum with continuous compounding)?