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

Cash Flows

TOTAL AUD CASH FLOWS

CNY 60 million * 0.2225 = 13

INR 45 million * 0.0421 = 2

MYR 33 million *  0.5886 = 19

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Total = 35

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PART 2

Total Increase in income @ 5.41%

amount	increase	total increase
60	3	63
45	2	47
35	2	37

Amount after investment

currency	total income	investment rate	amount invested	return post investment
CNY	63	22%	14	49
INR	47	51%	24	23
MRY	37	40%	15	22

Rates for year 2

currency	rate	intrest rate	rate for year-two
CNY	0.2225	1.0234	0.2277
INR	0.0421	1.0234	0.0431
MRY	0.5886	1.0234	0.6024

Australian dollar (A$) cash flow for year-two

amount	rate	rate for year-two
49	0.2277	11.0000
23	0.0431	1.0000
22	0.6024	13.0000

total

25

PART 3

Earnings after increase @ 9.51%

amount	increase	total
60	6	66
45	4	49
33	3	36

Total amount remitted

year two	intrest rate	amount of return	total	year two	total
14	7.54%	1	15	66	81
24	11.18%	3	26	49	76
15	9.67%	1	16	36	52

Note :- year two earnings are invested in year three so rate of conversion of year three is used for year two earnings.

Australian dollar (A$) cash flow for year-three

amount	rate	rate for year-two
81	0.2277	18
76	0.0431	3
52	0.6024	32
total		53

PART 4

current value of the Perth International Co. using its expected cash flows in year-one, year-two and year-three

year	amount	present value @ 6.80%	amount
1	35	0.9363	32
2	26	0.8767	22
3	53	0.8209	44
total			98