Question
Cahaya Co. does business in Malaysia and New Zealand. In attempting to assess its operating exposure, it compiled the following information: Cahayas Malaysia sales are
Cahaya Co. does business in Malaysia and New Zealand. In attempting to assess its
operating exposure, it compiled the following information:
Cahayas Malaysia sales are somewhat affected by the value of the New Zealand
dollar (NZ$), because it faces competition from New Zealand exporters. It forecasts
the Malaysia sales based on the following three exchange rate scenarios:
Exchange Rate of NZ$ Revenue from Malaysian Business (in millions)
NZ$ = MYR 2.8914 100
NZ$ = MYR 3.0119 105
NZ$ = MYR 3.1324 110
Its New Zealand dollar revenues on sales to New Zealand invoiced in New Zealand
dollars are expected to be NZ$600 million.
Its anticipated cost of materials is estimated at MYR 200 million from the purchase
of Malaysia materials and NZ$100 million from the purchase of New Zealand
materials.
Fixed operating expenses are estimated at MYR 30 million.
Variable operating expenses are estimated at 20 percent of total sales (after
including New Zealand sales, translated to MYR amount).
Interest expense is estimated at MYR 20 million on existing Malaysia loans, and
the company has no existing New Zealand loans.
a) Forecast total net cash flows for Cahaya Co. (Malaysias and New Zealands)
under each of the three exchange rate scenarios.
b) Explain how Cahaya's projected net cash flows are affected by possible
exchange rate movements.
c) Explain 2 proactive methods on how it can restructure its operations to reduce
the sensitivity of its net cash flows to exchange rate movements without
reducing its volume of business in New Zealand.
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