A US firm has £800,000 of depreciation expense on its subsidiary’s books. The US income tax rate is 40 percent and the spot exchange rate is £0.75/$. If the dollar depreciates to £0.65/$, how much has the dollar tax shield (i.e., the tax savings because of depreciation expense) changed?
The tax shield declined $65,641.
The tax shield declined $32,000.
The tax shield increased $65,641.
The tax shield increased $32,000.
Change in tax shield=800000*40%/0.65-800000*40%/0.75
=65641.02564
The tax shield increased $65,641.
A US firm has £800,000 of depreciation expense on its subsidiary’s books. The US income tax...