Supplementary Assignment
Part A:
Case Study:
This case study is about Aussie Blades, Pty Ltd who was involved in a business of exporting Speedos “Rollers blades” to Thailand .It was not difficult for blades Inc. to generate minimum revenue of 180,000 pairs of Speedos annually with a fixed price of THB 4,594 per pair. Blades Inc. import raw material rubber & plastic of only 72, 000 pairs of Speedos from Thailand due to their excellent Quality & cost differentiation, remaining material for 108000 pairs are purchased from home country. The revenue generated from export to Thailand is stable however cost of goods sold keeps on changing. The company has two options to invest the revenues:
One is to enhance the production of Speedos
Other 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 such project which gives high interest rates and where the chances of appreciation of currency is high. In short which gives high profit. So by keeping in mind this principle we can say that the company should invest in Thailand because Thailand has high interest rates. But this higher interest rate is due to the economic instability in the country so a higher risk involves here. So if the company take 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 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 then as it has already done financing from Australia at 10 % so it would need further loan 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 exchange rate 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 first plan is better.
Question 4
Solution:
Here we are assuming that both Australian $ and Thai Baht are perfectly correlated. Which means that if one currency depreciates the other will also. So depreciation of one currency means the less cash flow for the company and hence have more adverse effect on blades along with the depreciation of the other currency. So more or less the options remains the same and hence the first option will be still 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 as among the largest bank in Australia. The bank has business across New Zealand, United States, Asia and United Kingdom. The bank was founded by the Government of Australia in 1911 and was privatised completely in 1996. In 1991 the Commonwealth Bank was listed on Australian Stock Exchange and according to recent statistics is among the largest Australian listed company. The financial services provided by the bank includes 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 Global presence in Asia, New Zealand, Europe and North America. Commonwealth Bank has the major share of revenue from its operations in Australia as it is among the major financial service provider of Australia. The second largest share of Revenue comes from New Zealand operations. According to annual report of 2017 the bank’s income from Australia is $ M 37,304 and from New Zealand it is $M 5,099. While the revenue from other locations like Asia, Europe and North America is $M 2,546.
Managing Foreign Exchange Risks:
The international business and currency environment is volatile so there is a need for every company to take risk management approach to foreign exchange and implement such strategies that helps the company to minimize the adverse currency exposure. The Commonwealth Bank is trying to minimize the currency risk by adopting hedging strategy. Hedging provides the opportunity for the bank to diversify the funding bases while having them avoid the exchange rate risk exposure. (Commonwealth Bank of Australia, 2017) These hedging strategy can be considered in three ways depending on the situation:
- Systematic hedging.
- Active hedging.
- Dynamic hedging.
AGL Energy Ltd:
AGL is the public listed company operating in Australia and is involved in both 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. And in 2006 it is termed as AGL Energy. The company generates energy from various power stations that uses natural gas, hydroelectricity, thermal power, solar energy, wind power and coal seam gas sources. According to AGL, it has more than 3.6 million customers in August 2017. It is one of the Australia’s largest private owner, developer and operator 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:
For managing the risk of energy prices the company uses the derivatives. These derivatives also helped in managing the interest rates and foreign exchange rate risk in the normal course of business. Moreover hedging strategy was also used by the company in the risk management. (AGL Energy Ltd, 2017)
Weekly chart of the foreign currency vs AUD exchange rate for each of the companies against its ASX listed share price for the past 2 years:
Exchange rate graph for year 2016-2018
Exchange rate graph for last two years is as follows:
Figure 1Trading Economics[1]
Share price of Commonwealth Bank for year 2016-2018
Share price of Commonwealth Bank is as follows:
Figure 2 Commonwealth Bank[2]
Share Price of AGL Energy Ltd for year 2016-2018
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 exchange rate is highly correlated. This is due to the fact that Commonwealth bank is also operating in other countries and its revenue shares depends on the other currency as well. While in case of AGL Energy ltd the little or no correlation can be seen between share prices and exchange rate. 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 the dual listing on stock exchanges. But if the companies prefer to list with some other stock exchange also then New York stock exchange is better option as it has vast variety of investors.
Advantaged of Dual listing
There are some of the advantages of dual listing which are as follows:
Increased Liquidity
The cross listing helps the organizations to trade the share in multiple currencies and numerous time zones. This will help the company to increase its liquidity and open more ways to increase the capital of the company. This dual listing increase the trade volume and decreases the spread of bid ask in 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 same risk usually have same expected returns in the two market.
Disclosure:
Cross listing can help the company in decreasing the cost of capital by improving the information environment of company as it is linked with the better awareness of media which helps in increasing the quality of accounting information.
Investor protection
When a company lists itself in other stock exchange it commit itself for higher corporate governance standards. These high standards make the investors feel safer in investing those companies. (Brown, 2017)
Disadvantages of cross listing
Following are the disadvantages of cross listing:
Costs
There is some cost associated with the listing of company to 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 includes the loss of controlling shareholder’s power. Sarbanes-Oxley Act increased cost of corporate governance regulations. ¾ new DR listing 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 ↑
