Question

Apply international valuation model for determining the value of MNC where Initial Investment/Cost is PKR 10 million where 6 million is financed by debt. The MNC obtains its cash proceeds from Australia, UK and USA which are AUD 60,000, GBP 30,000 and USD 13000 respectively in two years. Spot exchange rate is PKR 102.7/ AUD, PKR 204.2/ GBP, PKR 158/USD. The spot exchange rate two years from now is expected that USD and GBP will appreciate by 2.5% and 3.25% respectively whereas AUD will depreciate by 1.25%. Applicable cost of capital is 12%. Prevalent tax rate is 33.5%.

Find

1. Expected cashflow in PKR

2. Value of the MNC

3. Evaluate project feasibility

Read the attached article “ The Reflection of Exchange Rate Exposure and Working Capital Management on Manufacturing Firms of Pakistan” and analyse the commentary of authors on subject matter

Answer 1

Pleaser refer table below alongwith explanation underneath:

1. Expected cash flow is PKR 14.52m; this is Derived by achieving FX rate * receipts in foreign currency
2. FX rate is updated to reflect appreciation / depreciation in the currency. For example appreciation in USD by 2.5% in 2 years from 158PKR / USD would be 161.95 (158+(2.5% * 158) and so on for others.
3. Computation of PV factor in 2 years is computed in the table itself refer red highlighted numbers. This is nothing but 1/ (1+discount rate) for the first period and then resultant number divided by 1+discount rate.

Value of MNC = Value of MNC is derived through Free Cash flow which is converted to PV at discount rate. Since data isn't provided to compute free cash flow, it can be nothing bu sum of total equity and debt + reserves ( profit moved to reserves account). Therefore it would be PKR 10m + PKR 1.56 (net present value) = PKR 11.56m

Project feasibility and recommendation is given in the table. (please refer)

No read through article provided.