Question

PART1:

Perth International Co., an Australian multinational company, forecasts 70 million Australian dollars (A$) earnings next year (i.e., year-one). It expects 60 million Chinese yuan (CNY), 45 million Indian rupees (INR) and 33 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2225/CNY, A$0.0421/INR and A$0.5886/MYR.

Calculate the total Australian dollar (A$) cash flow for year-one. (enter the whole number with no sign or symbol)

PART2:

Perth International anticipates a 5.41 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 5.94 per cent, 8.75 per cent, 13.67 per cent and 10.18 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 22 per cent, 51 per cent and 40 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 Purchasing Power parity with considering a 2.34 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)

PART3:

In year-three, Perth International has a plan to expand the business in China, India and Malaysia. Consequently, it forecasts an 9.51 per cent increase in year-one earnings of its subsidiaries in year-three. Perth International anticipates 3.78 per cent, 7.54 per cent, 11.18 per cent and 9.67 per cent inflation in Australia, China, Indian and Malaysia, respectively, in year-three. It considers the Purchasing power parity to calculate the value of CNY, INR and MYR against the Australian dollar in year-three using the year-two exchange rates A$/CNY, A$/INR, and A$/MYR.

Note that investment of subsidiaries in year-two will be matured in this year and include these investment proceeds to the year-three cash flow. It means each subsidiary’s year-three cashflow is year-three earnings and year-two investment proceeds.

What is the total Australian dollar (A$) cash flow for year-three? (enter the whole number with no sign or symbol)

PART4:

The subsidiaries of Perth International remit their earnings and investment proceeds to the Australian parent at the end of each year. The annual weighted average cost of capital or required rate of return of Perth International is 6.80 per cent.

Calculate the current value of the Perth International Co. using its expected cash flows in year-one, year-two and year-three. (enter the whole number with no sign or symbol).

Answer 1

Part 1:

Calculation of cash flows for year 1 in Australian dollars:

Particulars	Australia	China	India	Malaysia
Expected cash inflows	A$ 70 Million	CNY 60 Million	INR 40Million	MYR 33 Million
Exchange Rate	-	A$/CNY 0.2225	A$/INR 0.0421	A$/MYR 0.5886
Cash flows in A$	70 Million	13.35 Million	1.85 Million	19.40 million

Total Cash Inflows for Year 1

= 70+13.35+1.85+19.40 = 105 million

Part 2:

Calculation of cash flows for year 2 in Australian dollars:

Given, Cash inflows for subsidiaries are expected to increase by 5.41% of year 1 cash flows

Particulars	China	India	Malaysia
Cash inflows for year 1	60 million	45 million	33 million
Cash inflows for year 2 [[email protected]% of year 1 cash flows]	63.25	47.40	34.75
% of Amount to be invested for 1 year	22%	51%	40%
Amount allocation for Investment	13.90	24.15	13.90
Balance amount to be remitted to Australia	49.35	23.25	20.85
Exchange Rate for year 2 [ WN 1]	0.2165	0.0390	0.5650
Cash flows in A$	10.65 million	0.95 million	11.75 million

Total cash inflows for year 2

= 10.65+0.95+11.75 = 23.35 million

WN 1: Exchange rate for year 2:

Particulars	Australia	China	India	Malaysia
Exchange Rate in year 1	-	0.2225	0.0421	0.5886
Nominal rate in year 2	5.94%	8.75%	13.67%	10.18%
Real rate	2.34%	2.34%	2.34%	2.34%
Inflation rate [ Nominal rate - Real rate]	3.6%	6.41%	11.33%	7.84%
Exchange Rate for year 2 [ F = S×[(1+Rp)÷(1+RB)]	-	0.2225×(1.036÷1.0641) = 0.2165	0.0421×(1.036÷1.1133) = 0.0390	0.5886×(1.036÷1.0784) = 0.5650

Here Rp is Inflation rate of price currency and Rb is Inflation rate of base currency

Part 3:

Calculation of cash flows for year 3 in Australian dollars:

Cash flows for year 3 are expected to increase by 9.51% of Year 1 cash flows for it's subsidiaries

Particulars	China	India	Malaysia
Cash inflows for year 1	60 million	45 million	33 million
Cash inflows for year 3 [ Increase @9.51% of year 1 cash flows]	65.75 million	49.30 million	36.15 million
Investment proceeds of year 2 received in year 3
Invested amount	13.90 million	24.15 million	13.90 million
Interest rate	8.75%	13.67%	10.18%
Investment proceeds	15.10 million	27.45 million	15.30 million
Total cash flows	80.85 million	76.75 million	51.45 million
Exchange Rate for year 3 [ WN 2]	0.2085	0.035	0.5345
Cash inflows in A$	16.90 million	2.70 million	27.50 million

Total cash inflows for year 3

= 16.90+2.70+27.50

= 47.10 million

WN 2: Exchange rate for year 3:

Particulars	Australia	China	India	Malaysia
Exchange rate for year 2	-	0.2165	0.0390	0.5650
Inflation rate	3.78%	7.54%	11.18%	9.67%
Exchange Rate for year 3 [ F = S ×[(1+Rp)÷(1+Rb)]	-	0.2165×(1.0378÷1.0754) = 0.2085	0.0390×(1.0378÷1.1118) = 0.035	0.5650×(1.0378÷1.0967] = 0.5345

Here Rp is inflation rate of price currency and Rb is Inflation rate of base currency

Part 4:

Calculation of Present value of cash inflows for year 1 to 3 in Australian dollars at required rate of return of 6.80%

Particulars	year 1	year2	year3
Cash inflows in A$	105 million	23.35 million	47.10 million
[email protected]%	0.9363	0.8767	0.8209
Present value of cash inflows	98.30 million	20.45 million	38.65 million

Total present value of cash inflows in A$

= 98.30+20.45+38.65

= 157 million