Question

 

1a/ Monash International Co., an Australian multinational company, forecasts 62 million Australian dollars (A$) earnings next year (i.e., year-one). It expects 58 million Chinese yuan (CNY), 47 million Indian rupees (INR) and 40 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2601/CNY, A$0.0360/INR and A$0.5945/MYR.

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

1b/ Monash International anticipates a 4.62 per cent increase in the year-one income of its subsidiaries in year-two. It has information that the current 4.88 per cent, 7.83 per cent, 13.78 per cent and 10.06 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 25 per cent, 51 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. Monash International believes in the International Fisher Effects with considering a 2.48 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)

1c/ In year-three, Monash International has a plan to expand the business in China, India and Malaysia. Consequently, it forecasts an 8.50 per cent increase in year-one earnings of its subsidiaries in year-three. Monash International anticipates 3.44 per cent, 7.20 per cent, 11.64 per cent and 9.16 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.

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

1d/ The subsidiaries of Monash 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 Monash International is 6.01 per cent.

Calculate the current value of the Monash 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

1.a)

Cash flow from China = 58M * 0.2601 = A$15.0858M

Cash flow from India = 47M*0.0360 =  A$1.692 M

Cash flow from Malaysia = 40M *0.5945 = A$23.78

Total cash flow in year one = A$40.56M

1.b) cash flow increase by 4.62% in year 2.

Cash flow from China = 58M * 1.0462 = CNY 60.6796

Cash flow from India = 47M*1.0462 = INR 49.1714

Cash flow from Malaysia = 40M *1.0462 = MYR 41.848

Investment done by China =  CNY 60.6796 * 0.25= CNY15.17

Investment done by India = INR 49.1714 * 0.51 = INR 25.08

Investment done by China = MYR 41.848 * 39 = MYR 16.32

Remaining amount paid to Parent company:

China = CNY 45.51

India = INR 24.09

Malaysia = MYR 25.53

International Fisher effect = (1+ ih) / (1+ if ) * Spot rate

China = (1+ 0.0783/(1+0488)) * 1/ 0.2601 = CNY 3.95 per A$ or A$0.2532 per CNY

India = (1+ 0.1378/(1+0.0488) * 1/0.0360 = INR 30.13 per A$ or A$ 0.0331 per INR

Malaysia = (1+ 0.1006/(1+0.0488) * 1/ 0.5945 = MYR 1.77 per A$ OR A$ 0.5650 per MYR.

Total cash flow in A$ after Investment= CNY45.51 * 0.2532 + INR 24.09*0.0331 + MYR 25.53*0.5650 = A$26.75

1.c) PP theorem = i+h/ i+f * Spot rate

Cash flow from China = 58M * 1.085= 62.93M

Cash flow from India = 47M* 1.085 = 50.995M

Cash flow from Malaysia = 40M * 1.085 = 43.40 M

PP of China = 1.0720/1.0344 * 1/ 0.2601 = CNY 3.98 per A$ or A$0.2532 per CNY

PP of India = 1.1164/1.0344 * 1/0.0360 = INR 29.98 per A$ or A$ 0.0334 per INR

PP of Malaysia= 1.0916/1.0344 * 1/0.5945 = MYR 1.78 per A$ OR A$ 0.5618 per MYR.

Total AU$ = 62.93 * 0.2532 + 50.995 * 0.0334 + 43.40* 0.5618 = A$ 42M

1.d) Annuity rate for 6.01% for next 4 years = 3.46

Cash flow from China = 58M * 3.46 * 0.2601 = A$52.20M

Cash flow from India = 47M* 3.46 * 0.0360 =  A$5.85M

Cash flow from Malaysia = 40M * 3.46* 0.5945 = A$82.28

Total currnet value of Australian $ = A$127.25