1) Advance International Co., an Australian multinational company, forecasts 63 million Australian dollars (A$) earnings next...

Advance International Co., an Australian multinational company, forecasts 63 million Australian dollars (A$) earnings next year (i.e., year-one). It expects 57 million Chinese yuan (CNY), 47 million Indian rupees (INR) and 36 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2140/CNY, A$0.0340/INR and A$0.6039/MYR.

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

Advance International anticipates a 4.22 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 4.91 per cent, 8.65 per cent, 13.61 per cent and 10.91 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 29 per cent, 52 per cent and 39 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. Advance International believes in the Purchasing Power parity with considering a 2.06 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)

In year-three, Advance International has a plan to expand the business in China, India and Malaysia. Consequently, it forecasts an 9.79 per cent increase in year-one earnings of its subsidiaries in year-three. Advance International anticipates 3.03 per cent, 7.66 per cent, 11.35 per cent and 9.17 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)

The subsidiaries of Advance 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 7.94 per cent.

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

Solutions

Expert Solution

Question 1 -Answer
Year one
Particulars	Expected earnings	Exchange rates	AUD $ in millions
Australian Parent company	63 million AUD $	1	63
Chinese Subsidary	57 million CNY	A$0.2140/CNY	12.198	(57*0.214)
Indian Subsidary	47 million INR	A$0.0340/INR	1.598	(47*0.034)
Malaysian Subsidary	36 million MYR	A$0.6039/MYR.	21.7404	(36*0.6039)
		Total	98.5364	AUD $

Exchange rates
Year one	year two		Inflation in AUS	inflation in respective countries	Year three exchange rates
A$0.2140/CNY	0.214	AUD $/CNY	0.0303	0.0766	0.20480	(0.214*1.0303/1.0766)	AUD $/CNY
A$0.0340/INR	0.034	AUD $/INR	0.0303	0.1135	0.03146	(0.034*1.0303/1.1135)	AUD $/INR
A$0.6039/MYR.	0.6039	AUD $/MYR	0.0303	0.0917	0.56994	(0.6039*1.0303/1.0917)	AUD $/MYR

Assumption: Since year two real interest rate is given as 2.06% in All the countries including Australia, there is no change in Exchange rates in year two

Question 2 - Answer
Particulars	Year one Expected earnings	Year two Expected earnings		Int %	Investment %	Invested amount		Exchange rates	Remittance

		in millions				Millions		Year two	AUD $ in millions
Chinese Subsidary	57 million CNY	59.4054	CNY	8.65	29	17.227566	CNY	0.214	9.026056
Indian Subsidary	47 million INR	48.9834	INR	13.61	52	25.471368	INR	0.034	0.799409
Malaysian Subsidary	36 million MYR	37.5192	MYR	10.91	39	14.632488	MYR	0.6039	13.82129
		Increase by 4.22%							23.64675	AUD $

Question 3 Answer
Particulars	Year one Expected earnings	Year three Expected earnings (1)	Investment maturity (2)		Total (1)+(2)		Exchange rates	Remittance

		in millions	in millions				Year three	AUD $ in millions
Chinese Subsidary	57 million CNY	62.5803	18.71775046	(17.22*1.0865)	81.2981	CNY	0.2048	16.64957795
Indian Subsidary	47 million INR	51.6013	28.93802118	(25.47*1.1361)	80.5393	INR	0.0315	2.533730156
Malaysian Subsidary	36 million MYR	39.5244	16.22889244	(14.63*1.1091)	55.7533	MYR	0.5699	31.77575939
		Increase by 9.79%						50.95906749	AUD $

Question 4 Answer
	Discounting factor @7.94%	Cashflows	Present values
	(1)	AUD $ (in millions) (2)	AUD $ (in millions) (1)*(2)
Year one Expected earnings	0.92644	98.5364	91.288
Year two Expected earnings	0.85829	86.6467	74.368
Year three Expected earnings	0.79516	113.9591	90.615
			256.272	AUD $

Since there is no information about increase in earning at parent company (in Australia) 63 million AUD $ is taken in all three years without any increase in cash flows + Remittance from subsidaries in respective years is discounted to calculate current value of company.

Assumption 2:

To calculated exchange rate for year two if we consider 2.06% as inflation rate then the exchange rate will be as follows:

Exchange rates	Year two	Inflation in AUS	Inflation in respective countries
Year one	Year three exchange rates
A$0.2140/CNY	0.2184	0.214*1.0206	AUD $/CNY	0.0303	0.0766	0.20902	(0.2184*1.0303/1.0766)	AUD $/CNY
A$0.0340/INR	0.0347	0.034*1.0206	AUD $/INR	0.0303	0.1135	0.03211	(0.0347*1.0303/1.1135)	AUD $/INR
A$0.6039/MYR.	0.6163	0.6039*1.0206	AUD $/MYR	0.0303	0.0917	0.58168	(0.6163*1.0303/1.0917)	AUD $/MYR

Based upon the above exchange rates even the remittance values and current value of company with change as following-

Question 2 - Answer
Particulars	Year one Expected earnings	Year two Expected earnings		Int %

		in millions
Chinese Subsidary	57 million CNY	59.4054	CNY	8.65
Indian Subsidary	47 million INR	48.9834	INR	13.61
Malaysian Subsidary	36 million MYR	37.5192	MYR	10.91
		Increase by 4.22%


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1) Advance International Co., an Australian multinational company, forecasts 63 million Australian dollars (A$) earnings next...

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