1. U-Point Corporation, an American firm, is planning to expand its operation to Malaysian market. The Company is targeting the smart sport watch segment of the market. Initial market research finds a high growth potential for the Company. U- Point has already obtained permission from relevant authorities to setup the factories in Penang. U-Point's initial investment in Malaysia includes purchasing the watch processing plant, and it will cost the Company RM140 Million. U-Point offers an additional working capital loan of RM10 million. Due to the increase of sales, the working capital is expected to grow at a rate of 3% over next four years. Plant modification cost is estimated to be RM8 million. The project is estimated to run for the next four years. U-Point has signed MOU with the Government. The MOU allows the Company to pay tax at 15% for the first two years and 20% for the remaining two years. The Government of Malaysia has accepted the offer to purchase the plant at the end of its operating life at book value. The MOU has also allowed U-Point to pay a reduced rate of withholding tax, which is 5% for the first two years, and 10% rate for the remaining two years. U-Point can transfer 100% of its income to its home currency (USD) every year. The machinery will be depreciated over the 5-year period according to the table below: Year 1 2 3 4 5 Depreciation % 18% 22% 30% 18% 12% Pre-tax earnings per annum are estimated to be RM65 million in the first year, and the earnings are estimated to grow at 10% rate per annum for the next three years. The spot rate of the Malaysian Ringgit to the United State Dollar is USD1 = RM4.15. Inflation rate in the United States is 2% this year and this rate is expected to be the same for the next four years. Malaysian inflation rate, however, is expected to change. The current inflation rate is 2%, and it will be 3%, 4%, 5% and 5% in the next four years. Required rate of return on similar project is 15% for the first two years and 18% in the remaining two years. (a) Based on the information above, estimate free cash flow to firm (net cash flows) for U-Point Corporation. You should analyse the financial prospects for the subsidiary as well as the parents. [45 marks] (b) Evaluate the project based on the net present value (NPV) method. [10 marks] (c) The Government of Malaysia offers an alternative to U-Point to accumulate all the yearly income, invest, and transfer at the end of year 4 instead of a year- by-year transfer. In return, the Government of Malaysia will allow the income to be reinvested in Malaysian securities market that earns an average return of 12% per annum, and the Government will not charge any withholding tax for the transfer at the end. Re-calculate the NPV of the project from the viewpoint of the parent firm. (d) U-Point is considering a cross listing in Singapore. Critically explain any ONE (1) advantage and any ONE (1) disadvantage of the cross listing in Singapore. Moreover, critically discuss how such move might affect its weighted average cost of capital (WACC). [Word Limit: 375 words] 1. U-Point Corporation, an American firm, is planning to expand its operation to Malaysian market. The Company is targeting the smart sport watch segment of the market. Initial market research finds a high growth potential for the Company. U- Point has already obtained permission from relevant authorities to setup the factories in Penang. U-Point's initial investment in Malaysia includes purchasing the watch processing plant, and it will cost the Company RM140 Million. U-Point offers an additional working capital loan of RM10 million. Due to the increase of sales, the working capital is expected to grow at a rate of 3% over next four years. Plant modification cost is estimated to be RM8 million. The project is estimated to run for the next four years. U-Point has signed MOU with the Government. The MOU allows the Company to pay tax at 15% for the first two years and 20% for the remaining two years. The Government of Malaysia has accepted the offer to purchase the plant at the end of its operating life at book value. The MOU has also allowed U-Point to pay a reduced rate of withholding tax, which is 5% for the first two years, and 10% rate for the remaining two years. U-Point can transfer 100% of its income to its home currency (USD) every year. The machinery will be depreciated over the 5-year period according to the table below: Year 1 2 3 4 5 Depreciation % 18% 22% 30% 18% 12% Pre-tax earnings per annum are estimated to be RM65 million in the first year, and the earnings are estimated to grow at 10% rate per annum for the next three years. The spot rate of the Malaysian Ringgit to the United State Dollar is USD1 = RM4.15. Inflation rate in the United States is 2% this year and this rate is expected to be the same for the next four years. Malaysian inflation rate, however, is expected to change. The current inflation rate is 2%, and it will be 3%, 4%, 5% and 5% in the next four years. Required rate of return on similar project is 15% for the first two years and 18% in the remaining two years. (a) Based on the information above, estimate free cash flow to firm (net cash flows) for U-Point Corporation. You should analyse the financial prospects for the subsidiary as well as the parents. [45 marks] (b) Evaluate the project based on the net present value (NPV) method. [10 marks] (c) The Government of Malaysia offers an alternative to U-Point to accumulate all the yearly income, invest, and transfer at the end of year 4 instead of a year- by-year transfer. In return, the Government of Malaysia will allow the income to be reinvested in Malaysian securities market that earns an average return of 12% per annum, and the Government will not charge any withholding tax for the transfer at the end. Re-calculate the NPV of the project from the viewpoint of the parent firm. (d) U-Point is considering a cross listing in Singapore. Critically explain any ONE (1) advantage and any ONE (1) disadvantage of the cross listing in Singapore. Moreover, critically discuss how such move might affect its weighted average cost of capital (WACC). [Word Limit: 375 words]