Part A:
Case Study:
This case study is about Aussie Blades, Pty Ltd, which was involved in exporting Speedos “Rollers blades” to Thailand. It was not difficult for Blades Inc. to generate a minimum revenue of 180,000 pairs of Speedos annually with a fixed price of THB 4,594 per pair. Blades Inc. imports raw materials, rubber & plastic, for only 72,000 pairs of Speedos from Thailand due to their excellent Quality & cost differentiation; the remaining materials for 108000 pairs are purchased from the home country. The revenue generated from exports to Thailand is stable; however, the cost of goods sold keeps on changing. The company has two options to invest the revenues:
- One is to enhance the production of Speedos
- Another is to invest in Australia
Ben Holt the CFO of the Blades Inc. takes in account to invest the excessive funds either in Australia at 8% interest rate or in Thailand at 15 % (due to unstable economy). CFO asked the analyst to give reasons for denying the proposal.
Question 1:
Solution:
According to the investment principle, a person should invest in a project that has high-interest rates and where the chances of appreciation of currency are high. In short, it gives high profit. So, by keeping this principle in mind, we can say that the company should invest in Thailand because Thailand has high-interest rates. However, this higher interest rate is due to the economic instability in the country, so a higher risk is involved here. So, if the company takes a high-interest rate, it has to delay the investment for one year. If the company invests in Australia, it will get the money immediately but at a lower interest rate & this is a trade-off between the currency and the interest rates.
Question 2:
Answer:
Revenues = 180,000 x THB 4,594 = THB 826,920,000
Cost of Goods Sold = 72,000 x THB 2,871 = THB 206,712,000
Net Revenue from Thailand can be found by subtracting the Cost of goods sold from revenue.
Net revenue from Thailand = THB 620,208,000
These net revenues received from Thailand are again invested in Thailand operations rather than Australia, as it has already done financing from Australia at 10 %, so it would need further loans to continue its operations in Australia.
Question 3
Solution:
Delayed conversion:
Future value = Present Value (1 + i) n
F.V = 62,028,000 (1 + 0.15)1
Future value = THB 713,239,200
Multiplying future value with exchange rate
= THB 713,239,200 x 0.0361
So after converting in Australian $ = $ 25,747,935
Immediate conversion:
First, we multiply with the exchange rate and then find the future value.
Present value = THB 620,208,000 x 0.0381
So after converting into Australian $ = $ 23,629,925
Future Value = Present Value (1 + i) n
FV = $ 23,629,925 x (1+ 0.08)
Future value = $ 25,520,319
Difference in both plans = $ 25,747,935 – $ 25,520,319
Difference = $ 227,616
Hence, the first plan is better.
Question 4
Solution:
Here, we are assuming that both the Australian $ and the Thai Baht are perfectly correlated, which means that if one currency depreciates, the other will also. So, the depreciation of one currency means less cash flow for the company and hence has more adverse effects on blades along with the depreciation of the other currency. So, more or less, the options remain the same, and hence, the first option will still be better.
Part B:
Chosen Companies:
The report analyses the working of the following two Australian MNCs that are part of the ASX20 index:
- Commonwealth Bank of Australia
- AGL Energy Ltd
Brief Introduction:
Commonwealth Bank of Australia:
Commonwealth Bank of Australia is a multinational bank and is considered among the largest bank in Australia. The bank has business across New Zealand, the United States, Asia, and the United Kingdom. The bank was founded by the Government of Australia in 1911 and was privatized completely in 1996. In 1991, the Commonwealth Bank was listed on the Australian Stock Exchange and, according to recent statistics, is among the largest Australian listed companies. The financial services provided by the bank include retail, funds management, institutional, and business banking. Investment, insurance, and broking services. (Commonwealth Bank of Australia, 2017)
International Business Position:
As already mentioned, the Bank has a Global presence in Asia, New Zealand, Europe, and North America. Commonwealth Bank has a major share of revenue from its operations in Australia as it is among the major financial service providers in Australia. The second largest share of Revenue comes from New Zealand operations. According to the 2017 annual report, the bank’s income from Australia is $ 37,304 M, and from New Zealand, it is $ 5,099 M. At the same time, the revenue from other locations like Asia, Europe, and North America is $ 2,546 M.
Managing Foreign Exchange Risks:
The international business and currency environment is volatile, so every company needs to take a risk management approach to foreign exchange and implement strategies that help minimize adverse currency exposure. The Commonwealth Bank is trying to minimize the currency risk by adopting a hedging strategy. Hedging provides the opportunity for the bank to diversify its funding bases while avoiding exchange rate risk exposure. (Commonwealth Bank of Australia, 2017) This hedging strategy can be considered in three ways, depending on the situation:
- Systematic hedging.
- Active hedging.
- Dynamic hedging.
AGL Energy Ltd:
AGL is a publicly listed company operating in Australia that is involved in both the generation and retailing of gas and electricity for both commercial and residential use. It was founded in 1837 with the name of Australian Gas Light Company. In 2006, it was termed AGL Energy. The company generates energy from various power stations that use natural gas, hydroelectricity, thermal power, solar energy, wind power, and coal seam gas sources. According to AGL, it had more than 3.6 million customers in August 2017. It is one of Australia’s largest private owners, developers, and operators of energy assets. AGL is only operating in Australia but still the company has to manage the interest rate and exchange rate risk. (AGL Energy Ltd, 2017)
Managing Foreign Exchange Risks:
To manage the risk of energy prices, the company uses derivatives. These derivatives also helped manage interest rates and foreign exchange rate risk in the normal course of business. Moreover, the company also used a hedging strategy in risk management. (AGL Energy Ltd, 2017)
The weekly chart of the foreign currency vs. AUD exchange rate for each of the companies against its ASX listed share price for the past two years:
Exchange rate graph for the year 2016-2018:
The exchange rate graph for the last two years is as follows:
Figure 1Trading Economics[1]
Share price of Commonwealth Bank for year 2016-2018:
The share price of Commonwealth Bank is as follows:
Figure 2 Commonwealth Bank[2]
Share Price of AGL Energy Ltd for the year 2016-2018:
The share price of AGL Energy is as follows:
Figure 3 AGL Energy[3]
The above graphs show that the share price of Commonwealth Bank and the exchange rate are highly correlated. This is due to the fact that Commonwealth Bank is also operating in other countries, and its revenue shares depend on other currencies as well. In the case of AGL Energy Ltd, little or no correlation can be seen between share prices and exchange rates. This is due to the fact that the AGL operations are only based in Australia, so Exchange rate fluctuations have no effect on its share price.
Separate listing on a foreign stock exchange:
Both Commonwealth Bank and AGL Energy Ltd do not have dual listings on stock exchanges. However, if companies prefer to list with other stock exchanges, then the New York Stock Exchange is a better option as it has a wide variety of investors.
Advantages of Dual listing:
There are some of the advantages of dual listing which are as follows:
Increased Liquidity:
Cross-listing helps organizations trade shares in multiple currencies and in numerous time zones. This will help the company increase its liquidity and open more ways to increase its capital. This dual listing increases the trade volume and decreases the spread of bid-ask in the domestic market. (Brown, 2017)
Increased shareholder base:
This increase the shareholder base that will make the environment less risky. This also lowers the expected returns and increase the share prices.
Market integration:
The securities that have the same risk usually have the same expected returns in the two markets.
Disclosure:
Cross-listening can help the company in decreasing the cost of capital by improving the information environment of the company as it is linked with better awareness of m, media, which helps in increasing the quality of accounting information.
Investor protection:
When a company lists itself in other stock exchanges, it commits itself to higher corporate governance standards. These high standards make investors feel safer about investing in those companies. (Brown, 2017)
Disadvantages of cross-listing:
The following are the disadvantages of cross-listing:
Costs:
There are some costs associated with the listing of the company on any stock exchange. This cost can be one time cost like the registration cost or the ongoing cost that may be reporting or cost associated with disclosure requirements.
Relative costs:
Relative costs include the loss of controlling shareholder’s power. Sarbanes-Oxley Act increased the cost of corporate governance regulations. ¾ new DR listings were not in the U.S (Brown, 2017)
Bibliography
AGL Energy Ltd, 2017. Annual Report 2017, s.l.: s.n.
Brown, G., 2017. The Advantages of Cross-Listing Shares. [Online]
Available at: https://bizfluent.com/info-10019062-advantages-crosslisting-shares.html
[Accessed 24 March 2018].
Commonwealth Bank of Australia, 2017. Annual Report 2017, s.l.: s.n.
- https://tradingeconomics.com/australia/currency ↑
- https://www.commbank.com.au/about-us/shareholders/managing-your-shares/share-price-graph.html# ↑
- https://www.agl.com.au/about-agl/investor-centre/share-price-graphs ↑
