Question
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Minimal Limited, a Swedish company is a chocolates and health snacks producer. The company is considering...
Minimal Limited, a Swedish company is a chocolates and health snacks producer. The company is considering to open a new manufacturing facilities in South East Asia. After a thorough analysis, the choice of country has narrowed down to Malaysia and Thailand. The current Swedish Krona (SEK) is priced at MYR0.4338 and THB3.1375 respectively. Assume that Sweden does not impose any tax on the remittances by the subsidiary to the parent company.
| Expected inflation rate in Sweden | 3% |
| Expected inflation rate in Malaysia | 2.5% |
| Expected inflation rate in Thailand | 1.2% |
| WACC of Minimal Limited | 12% |
| Withholding tax in Thailand | 5% |
| Witholding tax in Malaysia | 4% |
a) The subsidiary is required to pay 5% of the subsidiary’s annual sales. The expected sales in Thailand and Malaysia is expected to be THB2,000,000 and MYR300,000. The sales is expected to grow at 6% annually in Thailand and 5% in Malaysia per year until the end of year 2. Compute the present values of the 2-year license fees in SEK for the parent company from potential subsidiaries in Thailand and Malaysia.
b) The subsidiary will also requested to pay dividends to parent company in Sweden. The dividend for the first year in Thailand will be THB 300,000 and expected to grow at 3% a year until the end of year 2. Subsidiary in Malaysia is expected to pay RM32,000 for the first year and expected to grow at 4% a year until the end of year 2. Compute the present values of the 2-year dividend in SEK for the parent company from potential subsidiaries in Thailand and Malaysia.
c) The initial cost of the subsidiary in Thailand and Malaysia are THB500,000 and MYR50,000 respectively. The terminal value after 2 years is estimated at THB250,500 in Thailand whilst in Malaysia will be MYR30,000. Assume no withholding tax on the terminal value. Which country should Minimal Limited choose to open new subsidiary?
Solutions
Expert Solution
| Information given in the question: | |||
| Minimal Limited: | |||
| WACC | 12% | ||
| Inflation rate | 3% |
Analysis of Malaysia
| Malaysia | Amount in MYR | ||||||
| currenrt exchange rate SEK-to- MYR | 0.4338 | ||||||
| Initial Cost | 50,000 | ||||||
| Sales | 300000 | ||||||
| Required to pay 5% of annual sales | 15000 | ||||||
| Annual Salse growth | 5% | ||||||
| Dividend for the 1st year | 32000 | ||||||
| Dividend growth rate | 4% | ||||||
| Expected Inflaton rate | 2.50% | ||||||
| Withholding tax | 4% | ||||||
| Terminal Value | 30000 | ||||||
| Year 1 | Year 2 | Year 2 | |||||
| Sales | 300000 | 315000 | |||||
| Repatriation | |||||||
| Dividend | 32000 | 33280 | |||||
| 5% of Sales | 15000 | 15750 | |||||
| Total amount available for repatriation | 47000 | 49030 | |||||
| Less: withholding tax @ 4% | 1880 | 1961.2 | |||||
| 45120 | 47068.8 | ||||||
| Terminal Value | 30000 | ||||||
| Less: Adjustment of Inflation rate @ 2.5% | 1128 | 1176.72 | 750 | ||||
| 43992 | 45892.08 | 29250 | |||||
| Dicounting factor @ 12% | 0.8929 | 0.7972 | 0.7972 | ||||
| Present Value | 39278.571 | 36584.89 | 23317.92 | ||||
| Applicable Exchange rate | 0.4338 | 0.4638 | 0.4638 | ||||
| Add: Infaltion rate @ 3% | 0.4638 | 0.4938 | 0.4938 | ||||
| Repatriation Amount | 18217.401 | 18065.62 | 11514.39 | ||||
| Total | 47797.407 | ||||||
| Initial cost in SEK | 21,690 | ||||||
| NPV = 47797.407-21690 | 26,107 |
Analysis of Thailand
| Thiland | Amount in THB | ||||||
| currenrt exchange rate SEK-to- MYR | 3.1375 | ||||||
| Initial Cost | 500000 | ||||||
| Sales | 2000000 | ||||||
| Required to pay 5% of annual sales | 100000 | ||||||
| Annual Salse growth | 6% | ||||||
| Dividend for the 1st year | 300000 | ||||||
| Dividend growth rate | 3% | ||||||
| Expected Inflaton rate | 1.20% | ||||||
| Withholding tax | 5% | ||||||
| Terminal Value | 250500 | ||||||
| Year 1 | Year 2 | Year 2 | |||||
| Sales | 2000000 | 2120000 | |||||
| Repatriation | |||||||
| Dividend | 300000 | 309000 | |||||
| 5% of Sales | 100000 | 106000 | |||||
| Total amount available for repatriation | 400000 | 415000 | |||||
| Less: withholding tax @ 3% | 12000 | 12450 | |||||
| 388000 | 402550 | ||||||
| Terminal Value | 250500 | ||||||
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