solution - Gandor - Type Debt Equity Cost 13.80% 18% Tax...

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Type Cost Tax rate After Tax Weight Product Debt 13.80% 30% 9.66% 60% 5.80% Equity 18% 18% 40% 7.20% WACC 13.00% Since Gandor applied a premium of 4 percentage points to its cost of capital for joint ventures in foreign countries Gandor also attempts to explicitly capture some types of country risk in the estimated cash flows, as explained sh
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s, its required rate of return on this joint venture is 17 percent. hortly.
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Scenario 1: Based on Original Assumptions Year 0 Total profits (in CHY) Profits allocated to Gandor Co.(50% of total) Corporate income taxes imposed by Chinese government (20%) Profits to Gandor after paying corporate income taxes in China Gandor’s dollar profits received from China (based on exchange rate of CHY1 = $.20) U.S. taxes paid (10%) Cash flows from joint venture PV of cash flows (using a 17% discount rate) Initial investment 12,000,000.00 Cumulative NPV of cash flows
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Year 1 Year 2 Year 3 60,000,000.00 80,000,000.00 100,000,000.00 30,000,000.00 40,000,000.00 50,000,000.00
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This note was uploaded on 05/13/2010 for the course MECH 17657 taught by Professor Ravikant during the Spring '10 term at Indian Institute of Technology, Delhi.

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solution - Gandor - Type Debt Equity Cost 13.80% 18% Tax...

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