Question

1. Perth International Co., an Australian multinational company, forecasts 66 million Australian dollars (A$) earnings next year (i.e., year-one). It expects 52 million Chinese yuan (CNY), 49 million Indian rupees (INR) and 35 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.3274/CNY, A$0.0441/INR and A$0.6657/MYR. Calculate the total Australian dollar (A$) cash flow for year-one.

The answer for this question is $108485200

2. Perth International anticipates a 5.55 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 5.63 per cent, 8.27 per cent, 13.90 per cent and 11.71 per cent nominal interest rate in Australia, China, India and Malaysia, respectively, will remain the same in the next three years. Due to foreign currency higher nominal interest rate, subsidiaries will invest 20 per cent, 55 per cent and 36 per cent of their year-two earnings in China, India and Malaysia, respectively, for next year. Subsidiaries will remit their remaining incomes (i.e., after investment) to the Australian parent. Perth International believes in the International Fisher Effects with considering a 2.69 per cent real interest in Australia, China, India and Malaysia to calculate the expected foreign currency value against the Australian dollar for year-two based on the year-one exchange rates A$/CNY, A$/INR, and A$/MYR. What is the total Australian dollar (A$) cash flow for year-two? (Enter the whole number with no sign or symbol)

Answer 1

1. You would not be able to calculate the cash flow but you can calculate the total earnings

Earnings in:

• AUD for next year - 66Mn
• CNY for next year - 52Mn the exchange rate is 0.3274x52 = AUD17.02Mn
• INR for next year - 49Mn the exchange rate is 0.0441x49 = AUD2.16Mn
• MYR for next year - 35Mn the exchange rate is 0.6657x35 = AUD 22.3Mn

The total would be 66Mn + 17.02Mn + 2.16Mn + 22.3Mn = AUD107.48Mn (rounded off) but this is not cash flow this is earnings and by earnings it means Profit after Tax

2. Again, you would not be able to calcluate the cash flow but you can calculate the total earnings

• AUD for next year - 66x(1+5.55%) =
• CNY for next year - 52Mn the exchange rate is 0.3274x52 = AUD17.02Mn
• INR for next year - 49Mn the exchange rate is 0.0441x49 = AUD2.16Mn
• MYR for next year - 35Mn the exchange rate is 0.6657x35 = AUD 22.3Mn

The table below is self explanatory with the growth in the earnings for Year 2, the amount invested and the amount left. The Internation Fisher Effect will depreciate the AUD against all the other currencies. Exchange rate *(1+ real Interest rate) is the formula used to calculate the year 2 exchange rate

All Values in Mns	Year 1	Growth	Year 2	% Invested	Investment	Amount left	Real Interest rate	Exchange Rate	Exchange rate Post IFE	Total
AUD	66.0	5.55%	69.66			69.66				69.66
CNY	52.0	8.27%	56.30	20%	11.26	45.04	2.69%	0.33	0.34	15.14
INR	49.0	13.90%	55.81	55%	30.70	25.11	2.69%	0.04	0.05	1.14
MYR	35.0	11.71%	39.10	36%	14.08	25.02	2.69%	0.67	0.68	17.11
									Total	103.05

The final earnings left after the subsidiaries have invested = AUD103.05Mn