Purchase Solution

# Hedging and Expected Tax Saving

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Suppose that Ashanti Gold Co. expects to produce a total of 1 million ounces of gold by the end of this year. Total manufacturing and operating cost will be \$250 million and interest expenses will be \$20 million. Ashanti forecasts the future gold price will be equally \$250, \$300, or \$350. The firm's tax rate is 20 % when taxable income is equal to or less than \$25 million, 30% when taxable income is greater than \$25 million but less than \$70 million, or 38% when taxable income is equal to or greater than \$70 million. There is no tax obligation when the firm incurs negative profit. Assume that forward gold price is now \$305 per ounce. If the firm decides to HEDGE 60 percent of its exposure to fluctuating gold price, how much will be the expected tax savings from this hedging activity?

##### Solution Summary

This solution shows step-by-step calculations in an Excel file to determine the expected tax savings from hedging activity on the fluctuating gold price.

##### Solution Preview

See the attached file.

Profits & Loss Statement when no hedging is used
Gold Price \$250 \$300 \$350
Below figures are in millions
Production Quantity (ounce) 1 1 1

Revenues \$250.000 \$300.000 \$350.000
Cost of production \$250.000 \$250.000 \$250.000
Operating profit \$0.000 \$50.000 \$100.000
Interest ...

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