# Abc inc an exporting firm expects to earn 20 million

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98. ABC Inc., an exporting firm, expects to earn \$20 million if the dollar depreciates, but only\$10 million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or depreciating. Calculate the expected tax of ABC if it is operating in a foreign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first \$7,500,000.Corporate income tax rate = 30% for earnings exceeding \$7,500,000. A.\$3,375,000B. \$6,000,000C. \$1,500,000D. \$4,500,000Expected tax:99. ABC Inc., an exporting firm, expects to earn \$20 million if the dollar depreciates, but only\$10 million if the dollar appreciates. Assume that the dollar has an equal chance of appreciating or depreciating. Step one: calculate the expected tax of ABC if it is operating in aforeign country that has progressive corporate taxes as shown below: Corporate income tax rate = 15% for the first \$7,500,000.Corporate income tax rate = 30% for earnings exceeding \$7,500,000.Step two: ABC is considering implementing a hedging program that will eliminate their exchange rate risk: they will make a certain \$15 million whether or not the dollar appreciates or depreciates. How much will they save in taxes if they implement the program? A.\$0B. \$3,375,000C. \$1,500,000D. \$4,500,000Expected tax without hedging = Expected tax with hedging:8-54
Chapter 08 - Management of Transaction Exposure100. A study of Fortune 500 firms hedging practices shows that A.Over 90 percent of Fortune 500 firms use forward contracts.B. Over 90 percent of Fortune 500 firms use options contracts.C. a) and b)D. None of the above8-55