Fairytale manufactures customized Integrated circuits () for use In computers , automobiles, and robots. Has been Fairytale distribution affiliate in Korea, but consideration is now being given to making Kim throne manufacturing affiliate. Cameraman's products would be sold primarily in Korea, and all sales would be denominated in Korean won. Sales. Sales in the first year are forecasted to be Won 22,000 million.
The physical volume of sales is expected to grow at 8% per annum for the foreseeable future. Working capital. Needs gross working capital (that Is, cash, receivables, and Inventory) equal to 20 % of sales. Half of gross working capital can be financed by local accruals and accounts payable, but the other half must financed by or Fairytale. Inflation. Price are expected to increase as follows. Korean general price level: Korean labor costs: average sales price: U. S. General price level: Korean raw material costs: +6% per annum +8% per annum +3% per annum per annum Parent supplied components.
Components sold to by Fairytale have a direct cost to Fair Tell equal to 96% of their sales price. Depreciation. Plant and equipment will be depreciated on a straight-line basis for both accounting and tax purposes over an expected life of eight years. No salvage value is anticipated. License fees. Will pay a license fee of 2 % of sales revenue to . This fee Is tax- deductible In Korea but provides taxable Income to Fairytale. Taxes. The Korean corporate income tax rate is 30% , and the U. S. Rate is 34%. Korea has no withholding tax on dividends, interest, or fees paid to foreign residents. Cost of capital.
The weighted average cost of capital used in Korea by companies of comparable risk is 22%. Fairytale also uses 22% for its investments. Exchange rates. In the year in which the Initial Investment takes place, the exchange rate Is Won 800 to the dollar. Forecasts the won to depreciate relative to the dollar at 3% per annum. Consequently , year-end exchange rates are forecasted to be as follows. Dividend policy. Will pay 65 % of accounting net income to Rater as an annual cash dividend. And Fair Tell estimate that over a five-year period the other 35% of net income must be reinvested to finance working capital growth.
Financing. Will be financed by Fairytale with 9,000,000 purchase of Won 7,200,000,000 common stock, all to be owned by . In order to prepare the normal cash-flow projections, the project team has made the following assumptions. 1. Sales revenue 2. Korean raw material costs 3. Parent-supplied component costs 4. Direct labor 5. General and administrative expenses 6. Liquidation value. At the end of five years, the project (including working capital) million, equal to $8,626,081 at the expected exchange rate of Won 927. 2/$. This sales price is free of all Korean and U.
S. Taxes, and will be used as a terminal value for capital budgeting purposes. Exhibit 1 . Beginning Balance Sheet, (year O) Items Million of Won Thousands of Dollars Assets 1 . Cash balance 720 2. Accounts receivable 3. Inventory 1 ,280 1 ,600 4. Net plant and equipment 6,000 7,500 5. Total 8,000 10, Liabilities and Net Worth 6. Account payable 1 ,200 7. Common stock equity 7,200 9,000 8. Total Exhibit 2. Revenue and Cost Data for (millions of won) Item Year 2 3 5 1 . Total sales revenue 22,000 2. Korean raw material 000 3.
Components purchased from parent 4. Korean labor 5. Total variable costs 1 5000 6. Gross profit 7000 7. License fee 8. General & administrative.