Heraklion Company a U S based company is considering

making an equity #3465

Heraklion Company (a U.S.-based company) is considering making an equity investment in an
Australian manufacturing operation. The total amount of capital, in Australian dollars (A$), that
Heraklion would need to invest is A$1,000,000. Heraklion has three alternatives for financing
this investment:• 100 percent equity.• 80 percent equity and 20 percent long-term loan from
Heraklion (5 percent interest rate).• 50 percent equity and 50 percent long-term loan from
Heraklion (5 percent interest rate).Heraklion estimates that the Australian operation will
generate A$200,000 of income before interest and taxes in its first year of operations. The
operation will pay 100 percent of its net income to Heraklion as a dividend each
year.Required:a. Assume there is no tax treaty between the United States and Australia. Using
the information on Australian tax rates found in Exhibit 11.1 and Exhibit 11.3, determine the total
amount of taxes that will be paid in Australia under each of the three financing alternatives.
Which alternative results in the least amount of taxes being paid in Australia?b. The United
States/Australia tax treaty provides reduced withholding tax rates on certain payments made to
a foreign parent company. Use the information on Australian tax rates found in Exhibit 11.1 and
Exhibit 11.4 to determine the total amount of taxes that will be paid in Australia under each of
the three financing alternatives. Which alternative results in the least amount of taxes being paid
in Australia?View Solution:
Heraklion Company a U S based company is considering making an equity

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