Alfa Finance LLC is based in the U.S. with two subsidiaries, one located in the UK, and other in Norway. The US dollar has been depreciating against the Euro. The British pound has been appreciating against the U.S. dollar. The U.S. parent company exports their main merchandise, luxury trams, in USD. The British subsidiary exports both in USD and in Euro. The Norwegian subsidiary exports predominantly in Euro. The parent company is now contemplating the possibility to open another subsidiary in Canada. Information about the British subsidiary operations are provided as follows: Information about the British subsidiary operations are provided as follows: 4,000,000 12 British Subsidiary information: Sales volume Sales price (p/u) Direct cost (pu) Depreciation Selling and administration expenses Current Assets (2020) Current Liabilities (2020) Long term loans (2020) 600,000 1,300,000 1.200,000 800,000 1,100,000 Working capital is expected to stay the same for the next 5 years. Tax rate 25% The foreign exchange rate changed from $1.3/ to $1.45/ in early 2020 and is expected to stay the same for the next few years. The weighted average cost of capital is 15%. You can assume the analysis is conducted over 3 years. Assume there is no change in working capital over the next 5 years. (a) Why would Alfa Finance LLC consider opening a subsidiary overseas in Canada? Explain your answer with a brief example for each factor you find important. [2.5 marks] (b) Provide an analysis of the potential effect of the change in exchange rate for the U.S. parent company, for the British subsidiary and for the Norwegian subsidiary. You can assume the above rates [3 marks] (c) Evaluate the effect of the following scenarios on the potential net worth ($) of the British subsidiary based on the latest exchange rate: No strategic change in the operations An increase in the selling price by 15% for each of the next 3 years. An increase in the volume by 5%, accompanied by a decrease in price by 12%. [5 marks] (d) Why would you recommend a risk share agreement if you are a U.S firm and you are importing to Canada? Explain your answer. [2 marks] Alfa Finance LLC is based in the U.S. with two subsidiaries, one located in the UK, and other in Norway. The US dollar has been depreciating against the Euro. The British pound has been appreciating against the U.S. dollar. The U.S. parent company exports their main merchandise, luxury trams, in USD. The British subsidiary exports both in USD and in Euro. The Norwegian subsidiary exports predominantly in Euro. The parent company is now contemplating the possibility to open another subsidiary in Canada. Information about the British subsidiary operations are provided as follows: Information about the British subsidiary operations are provided as follows: 4,000,000 12 British Subsidiary information: Sales volume Sales price (p/u) Direct cost (pu) Depreciation Selling and administration expenses Current Assets (2020) Current Liabilities (2020) Long term loans (2020) 600,000 1,300,000 1.200,000 800,000 1,100,000 Working capital is expected to stay the same for the next 5 years. Tax rate 25% The foreign exchange rate changed from $1.3/ to $1.45/ in early 2020 and is expected to stay the same for the next few years. The weighted average cost of capital is 15%. You can assume the analysis is conducted over 3 years. Assume there is no change in working capital over the next 5 years. (a) Why would Alfa Finance LLC consider opening a subsidiary overseas in Canada? Explain your answer with a brief example for each factor you find important. [2.5 marks] (b) Provide an analysis of the potential effect of the change in exchange rate for the U.S. parent company, for the British subsidiary and for the Norwegian subsidiary. You can assume the above rates [3 marks] (c) Evaluate the effect of the following scenarios on the potential net worth ($) of the British subsidiary based on the latest exchange rate: No strategic change in the operations An increase in the selling price by 15% for each of the next 3 years. An increase in the volume by 5%, accompanied by a decrease in price by 12%. [5 marks] (d) Why would you recommend a risk share agreement if you are a U.S firm and you are importing to Canada? Explain your answer. [2 marks]
