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MNC-exercises - exercises
Multinational Business Finance (Đại học Kinh tế Quốc dân)
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
Chapter 2.
Type 1. Hedging options
For example 1. A U.S. business plans to need NZ$100,000 over the next six months. The company has built
an exchange rate probability table (NZD/USD). Know F1/2 (NZD/USD) = 0.52, S(NZD/USD) = 0.49. Consider
whether the business should take precautions against exchange rate fluctuations.
1. Real cost of hedging payables
RCHp = NCHp – NCp
NCHp: Nominal cost of hedging payables
NCp: Nominal cost of payables without hedging
2. Real cost of hedging receivables
RCHr = NRr - NRHr
NRr: Nominal revenue of receivable without hedging
NRHr: Nominal revenue of hedging receivables
Exchange
NZD value for the next 6 months
Probability
0,4
5%
0,45
10
0,48
30
0,5
30
0,53
20
0,56
5
Probability
NCHp
NCp
RCHp
5%
100,000*0.52 =
0.4*100.000 =
52000-
52,000
40,000
40000=
rate
0,4
12.000
0,45
10%
52.000
45.000
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7.000
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
0,48
30%
52.000
48.000
4.000
0,5
30%
52.000
50.000
2.000
0,53
20%
52.000
53.000
(1000)
0,56
5%
52.000
56.000
(4000)
E(RCHp/RCHr) = * RCHi = 5%*12,000 +....+ 5% * (-4000) = 2,700 >0
∑ Pi
Therefore, the business should implement Hedging
Example 2. A U.S. business will receive S$500,000 within the next 12 months. S(SGD/USD) = 0.6.
F(SGD/USD) = 0.62. Market parameters are as follows: Future spot rate is 0.61; 0,63 ; 0.67 with the
probability: 20%, 50%, 30%. SGD's 12-month option costs 0.63 and the option fee is 0.04 USD/SGD, I
(USD)= (8%-9%), I(SGD) = (5%-6%). Choose the most suitable hedging option. Comparing hedging options
and advising businesses in implementing to prevent exchange rate risks?
Solution:
* Hedging term: Signing a S$500,000 contract futures contract, nominal income of receivables (the amount
of USD received in the next 12 months) when performing Hedging is: 500,000 * 0.62 = 310,000 USD
* Hedging in the currency market: The enterprise making the SGD loan converts to USD to invest and uses
the receivable to pay after 1 year. The amount of SGD to borrow at the present time is: 500,000/
(1+6%)=471,698 SGD
So the amount of USD the business invested : 471,698 * 0.6 = 283,019 USD
Interest and principal of USD received after 1 year is 283,019 *(1+8%) = $305,661
* Hedging options:
* The USD value that the business obtains when hedging by option contract is (SGD money value will be
obtained * option rate – option fee)
500,000 SGD * 0.63 – 500,000 * 0.04 = 295,000 USD
* USD value that the business receives when not hedging by option contract: The weighted average of the
exchange rate - option fee
500,000 SGD * 0.61 – 500,000 * 0.04 = 285,000 USD
500,000 SGD * 0.63 – 500,000 * 0.04 = 295,000 USD
500,000 SGD * 0.67 – 500,000 * 0.04 = 315,000 USD
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
Or the expected USD value which the business will receive in the next 12 months is Total (the value of the
USD the business acquires when hedging by option contract * probability of the expected exchange rate) =
285,000 * 0.2 + 295,000*0.5 + 315,000*0.3 = 299,000 USD
*The business does not perform Hedging:
The total value of USD when transferring SGD 500,000 to is:
500,000 * 0.61 * 0.2 + 500,000 * 0.63 * 0.5 + 500,000 * 0.67 *0.3 = $319,000
Conclude:
-
In three Hedging methods, when the business does not perform hedging, they receive maximum
receivables. Therefore, in this case, the enterprise should not implement the plan to prevent risks of
exchange rate fluctuations
Application exercises
A British business will have a receivable of $150,000 over the next three months. S(USD/GBP) =
0.7621. F1/4(USD/GBP) = 0.8210. Market parameters for the next 3 months with the S(USD/GBP) spot rate
of 0.7991, respectively; 0,7212; 0,8120; 0,8111; 0.7912 with the probability of: 5%, 35%, 20%, 25%, 15%
respectively. The option to sell (USD/GBP) = 0.8000, the option fee is 0.004 GBP/ USD. Choose the
appropriate Hedging method. Comparing hedging methods and advising businesses on whether to implement
exchange rate fluctuations? I(GBP) = 4 – 41/8 ; I(USD) = 2 - 21/2 % year.
Chapter 3.
Type 2. Invest in surplus cash
A U.S. multinational has a cash surplus of $1000,000. The company deposits this surplus cash at the Bank
using SGD with a 3-month interest rate of 8%. S(SGD/USD) = 0.5276 at the time of deposit. Assuming at the
time of withdrawal, the exchange rate (SGD/USD) = 0.5386. Determine the return on investment of surplus
funds.
Way 1.
Step 1. Transfer surplus USD to SGD for investment
The number of SGDs obtained by the enterprise is:
$1000,000 : $0.5276 = 1,895,375.28 (SGD)
Step 2. 3-month SGD investment. The amount of money collected by the business is:
1,895.375.28 * (1+8%/4) = 1,933,282.79 (SGD)
Step 3. Transfer SGD to USD at the time of deposit withdrawal.
The amount of dollars the company earns is:
1,933,282,79 * 0.5386 = 1,041,266.11 (USD)
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
Step 4. Calculate the profit margin from the deposit of the surplus cash amount
(1.041.266.11 – 1000,000)/1000,000 = 0.041266 = 4.13%
Way 2. Apply the formula of calculating the profitability from investing the surplus amount through
depositing at the bank during the period of idle money
rf = (1+ if) (1+ ef) - 1
Hypothetically we have:
if = 8% * 1/4 = 2%
ef = (0,5386 – 0,5276)/0,5276 = 0,021
From which we have the result as followings:
rf = (1+ 2%) (1+ 0.021) - 1 = 0.0413... = 4.13%
Type 3.
1. MNC company has a parent company in China, with branches/subsidiaries in many countries around the
world. Every month, branches and parent companies make the settlement of transactions through the payment
matrix table as follows, the unit is millions of CNY is made as follows:
Value of
Payment value/Payable
Total
received/Receivables
payable
China
Japan
America Germany
Great
Netherlands
Britain
China
-
50
70
60
90
80
Japan
40
-
80
20
30
90
America
70
40
-
10
40
70
Germany
60
20
90
-
50
50
Great Britain
70
30
70
60
-
60
Netherlands
60
80
40
50
70
-
350
Total receivables
How can the company use multilateral net balance payment methods to reduce foreign exchange transactions
between these affiliates?
The company uses the multilateral net balance payment method as follows:
Value of
received/Receivables
Payment value/Payable
China
Sun
America
Germany
Great
Britain
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Netherlands
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
China
-
10
0
0
20
20
Japan
0
-
40
0
0
10
America
0
0
-
0
0
30
Germany
0
0
80
-
0
0
Great Britain
0
0
30
10
-
0
Netherlands
0
0
0
0
10
-
Type 4: Identifying the position of the business in the industry
Based on inventory volume:
MNC enterprises have the cost of goods sold in 2018 is 40,000 USD and the inventory volume in 2018
is 90,000 USD. Know the inventory in 2017 is $75,000. We can say the inventory turnover factor of the whole
industry is 0.5.
How to do it?
Step 1. Determine the average inventory volume
(Last year's inventory + This year's inventory)/2
Step 2. Determine the inventory turnover of the business
The average cost of goods sold / Inventory
Step 3. Assess the position of the business in the industry
Based on receivables:
An MNC enterprise in 2018 accounted for net sales of GBP 140,000. The amount still receivable in
2017 is GBP 36,000. The amount receivable in 2018 is GBP 43,200. Suppose the number of days of receivables
is 60 days. Determine the position of the business in the industry.
Step 1. Determine the average receivable of the business
Average receivables = (previous year's remaining receivables + this year's receivables)/2
Step 2. Determine the turnover index of receivables
Turnover index of receivables = (average net revenue/receivables)
Step 3. Periodically collect the average amount of receivables = 365 / turnover index of receivables
Step 4. Assessing the position of the business in the industry
Chapter 4
Type 5. Selection of investment projects
1. Net present value method – NPV
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
When the NPV > 0, the investment project has a higher return rate than the opportunity cost of capital or the
profit rate > the discounted interest rate (The profit rate > discount interest rate)
For example, a company is considering an investment project that has estimated cash flows for 4 years as
follows:
Year
Cash flow
0 (current year)
100.000
1
160.000
2
90.000
3
20.000
4
30.000
The company's cost of capital is 15%. NPV=? And assess whether to carry out the project.
NPV = -100,000 + 160,000(1+0.15%)1 + 90,000(1+0.15%)2 + 20,000(1+0.15%)3 + 30,000(1+0.15%)4 =
137,486.29 > 0
Conclusion: Businesses should invest in this project. Because the proceeds will be enough to offset the
opportunity cost of the initial investment inflow.
2. Internal Rate of Return method - IRR
IRR  r1 
NPV 1( r 2  r1)
NPV 1  NPV 2
An MNC business is considering whether to buy a $100,000 machine, which could save $25,000 per year for
five years and has a residual value of $15,000 by the end of its fifth year. The company's policy is that the
company only implements the project when the project generates a profit that has discounted cash flow of
more than 10%. Decide whether the project should be done or not.
Guidance:
With r = 10%
NPV1 = -100,000 + 25,000/(1+10%)1 + 25,000/(1+10%)2 + 25,000/(1+10%)3
25,000/(1+10%)5 + 15,000/(1+10%)5 = 4,083.49 > 0
Therefore, we should choose r2 > r1
With r2 = 13%
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+
25,000/(1+10%)4 +
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
NPV2 = -100,000 + 25,000/(1+13%)1 + 25,000/(1+13%)2 + 25,000/(1+13%)3
+
25,000/(1+13%)4 +
25,000/(1+13%)5 + 15,000/(1+13%)5 = - 3927.82 < 0
IRR = 10% + [4083.49 (13% - 10%)]/ (I4083.49I + I- 3927.82I = 11.53% > r1 = 10%
Conclusion: Businesses should invest in the project because there is an IRR > the opportunity cost of using
capital.
3. Profitability Index Method - PI
Example 1:
PL is evaluating an investment in a new production line with an initial investment of $7,000. If used,
the line is expected to generate a cash flow of $2,000 over five years. Bassing on the PI method, please
appraise and decide on choosing the project knowing the cost of using the capital of the project is 10%.
PV1 = 2000/(1+10%)1 + 2000/(1+10%)2 + 2000/(1+10%)3 + 2000/(1+10%)4 + 2000/(1+10%)5 = 7,581.57 USD
PI1 = PV1/ I = 7,581.57/7000 = 1.08 > 1
Chapter 5.
Type 6. Capital structure and capital expenditures/Cost of capital
Pre-tax loan costs (Kd) are calculated based on loan interest rates.
After-tax debt expense kd(1-T), determined by the cost of pre-tax debt minus tax savings.
This portion of savings is determined by pre-tax costs multiplied by the tax rate (KdxT)
Ke = Rf + β(Rm – Rf) - This is the cost of equity.
Rf: Risk-free rate
RM: Market rate
Kd = Rf (1- T) - This is the cost of the loan after tax.
For example.
A business is considering two different markets with the following information:
New Zealand market:
-
The interest rate is 18%
-
Target capital structure: 30% loan, 70% equity
-
β coefficient = 1.4
-
Profitability in the market: 20%
-
Free risk rate: 6%
-
Corporate income tax: 20%
UK market:
-
Interest expense is 15%
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
-
Target capital structure: 45% loan, 55% equity
-
β coefficient = 0.85
-
Profitability rate in the market: 25%
-
Free risk rate: 6%
-
Corporate income tax: 22%
a. Providing advice to investment projects more effectively
b. If the target capital structure of the project in the UK market is 30% of loans and 70% of equity, should the
business choose the project in the UK market?
Solution
a.
In the New Zealand market:
The cost of capital after tax is: Kd = kd (1-T) = 18%(1-20%) = 14.4%
The cost of equity is: Ke = Rf + β(Rm - Rf) = 6% + 1.4(20% - 6%) = 25.6%
The average cost of capital in the New Zealand market is:
WACC = 30% * 14.4% + 70% * 25.6% = 22.24%
In the UK market:
The cost of capital after tax is: Kd = kd (1-T) = 15% (1-22%) = 11.7%
The cost of equity is: Ke = Rf + β(Rm - Rf) = 6% + 0.85(25% - 6%) = 22.15%
The average cost of capital in the UK market is:
WACC = 45% * 11.7% + 55% * 22.15% = 17.45%
So WACC UK < WACC in NZ, businesses should invest in the UK market
b. WACC' in the UK is:
WACC' = 30% * 11.7% + 70% * 22.15% = 19.02%
So WACC' UK < WACC in NZ, businesses should still invest in the UK market
For example.
HNTCO is a UK MNC that is considering a plan to finance a project in China with the following market data:
-
The risk-free return rate in the UK is: 5%
-
Free risk rate in China: 8%
-
The interest rate on GBP loans from the UK: 2%
-
The interest rate on CNY loans from Chinese: 3%
-
β of England is 2.5; β in Chinese is 1.5
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Nguyen Thi Dieu Chi PhD. - School of Banking and Finance National Economics University
Multinational corporate finance exercises
-
The UK market interest rate is expected to be 14%, and the Chinese market is expected to be 10%. The
corporate tax rate in the UK: 25%
-
The corporate tax rate in Chinese: 20%
-
Creditors will allow no more than 40% of the financial supply to be in the form of loans.
There are four capital options as follows:
1. 30% of loans from China, 70% of UK equity
2. 20% of UK loans, 20% of loans from China, 60% of UK equity
3. 40% of UK loans, 60% of Chinese equity
4. 40% of Chinese loans, 60% of UK equity
Choose the right capital structure so that the cost of capital is the smallest.
Solution
The cost of borrowing in GBP is:
(5% + 2%) (1-25%) = 5.25%
The cost of borrowing in CNY is:
(8% + 3%) (1 - 20%) = 8.8%
The cost of equity in GBP is:
5% + 2.5 (14% - 5%) = 27.5%
The cost of equity in CNY is: 8% + 1.5 (10% - 8%) = 11%.
Planned capital
UK loans (cost
Chinese loans
UK Equity
Chinese
structure
5.25%)
(Cost 8.8%)
(cost 27.5%)
stock capital
WACC
(cost 11%)
30% of Chinese loans
30% * 8.8% =
70% * 27.5% =
70% of UK equity
2.64%
19.25%
21,89%
40% of UK loans
40% * 5.25% =
60% * 11% =
60% of China's stock
2.1%
6.6%
8,7%
capital
20% of uk loans
20% * 5.25% =
20% * 8.8% =
60% * 27.5% =
20% of Chinese loans
1.05%
1.76%
16.5%
40% of Chinese loans
40% * 8.8% =
60% * 27.5% =
60% of UK equity
3.52%
16.5%
19,31%
60% of UK equity
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20,02%