Question

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?

Answer 1

Basic information

	Current money rate	inflation	WACC	TDS	Sales	Growth rate
minimal limited swedish company	1	3%	12%
Malaysia	0.4338	2.50%		4%	3,00,000	5%
Thailand	3.1375	1.20%		5%	20,00,000	6%

Anuswer 1-

Country	1st year sales	2nd year sales	1st license fees	2nd license fees	1st Year Net license fees after TDS	2nd Year Net license fees after TDS	1st year Present value	2nd year Prsent value	1st year currency	2nd year currency	1st year PV in Sweden	2nd year PV in Sweden
Malaysia	3,00,000	3,15,000	15,000	15,750	14,400	15,120	12,857.14	12,053.57	0.4317	0.4296	29,782.99	28,057.75
Thailand	20,00,000	21,20,000	1,00,000	1,06,000	95,000	1,00,700	84,821.43	80,277.42	3.0827	3.0288	27,515.57	26,504.71

Anuswe 2-

Country	Dividend 1st year	Dividend 2nd year	Dividend 1st year after TDS	Dividend 2nd year after TDS	1st year Present value	2nd year Prsent value	1st year PV in Sweden	2nd year PV in Sweden
Malaysia	32,000	33,280	30,720	31,949	27,429	25,469	63,537	59,286
Thailand	3,00,000	3,09,000	2,85,000	2,93,550	2,54,464	2,34,016	82,547	77,264

Anuswer 3-

Particulars	Malyasia	Thailand
License fee	57,840.74	54,020.29
Dividend	1,22,824	1,59,810
Terminal value	55,670.15	65,932.78
Less-
Intial Cost	1,15,260.49	1,59,362.55
Benefit	1,21,073.93	1,20,400.97

Conclusion- Since the benefit derived from Malaysia is more Minimal Limited  has to inevst in the malyasia

Note-

Computation of exchange rate for 2 years for Malyasia for understanding

SEK to Malayasia

1st year = (0.4338*102.5%)*103%= 0.4317

2nd year = (0.4317*102.5%)*103%= 0.4296