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Hollender Company is a South-African based manufacturer of kitchen furniture. The company?s senior management have believed for several years that there is little opportunity to increase sales in the domestic market and wish to set up a manufacturing subsidiary in Tanzania. Because of high transportation costs, exporting from South Africa is not financially viable.

The Tanzania subsidiary would involve itself in the construction of a new factory in Dar es Salaam. The projected costs are shown below:-

	Now Tshs. ?000?	Year 1 Tshs. ?000?
Land	23,000	-
Building	16,000	62,000
Machinery	-	64,000
Initial Investment in Working Capital	15,000	-

Production and sales in year two are estimated to be 2,000 kitchen furniture at an average price of Tshs. 200,000 (at current prices). Production and sales in each of years 3 ? 5 is forecast at 2,500 units. Total local variable costs in Tanzania in year two are expected to be Tshs. 110,000 per unit (at current prices). No tax allowable depreciation exists on fixed assets.

All prices and costs in Tanzania are expected to increase annually by the current rate of inflation. The after tax realizable value of the investment in five years? time is expected to be approximately Tshs. 162 million at price levels then ruling.

Inflation for each of the next six years is expected to be:

South Africa	3%
Tanzania	5%

The cost of capital for the company is 10%. The spot exchange rate is Tshs. 50/SAR. Corporate tax in Tanzania is 30%, in SA 40%. Taxation is payable, and allowances are available, on year in arrears. The government of Tanzania is anxious to encourage foreign investment and thus allows overseas investors to repatriate an annual cash dividend equal to that year?s after tax accounting profit. Cash remitted to South Africa from the subsidiary is not taxable in South Africa.

Apt Financial Consultants P16 CPA Reviews INTERNATIONAL FINANCE Question One Dingi Corp, is a US based Multinational Corporation (MNC), with a subsidiary in Tanzania that produces and sells farm equipment. Dingi believes that they can also develop an equipment repair business in Tanzania, which will cost the company Tshs. 10 million. Market study further indicates the following: The business will generate cash flows estimated at Tshs. 5 billion, 8 billion, 7 billion, 9 billion and 6 billion Assume the government imposes no taxes on income earned by the business. However, it does impose a withholding tax of 15% on any funds remitted to the parent company. The US government will tax any US$ earnings received by the parent company form the subsidiary company at the rate of 20% The required rate of return on the project is 24%. This rate is dependent on existing economic conditions, the firm's capital structure, and the project's risk. The host government will acquire the business in the 5th year with little compensation of Tshs. 50 million to DINGI. The Tshs. Value to US$ is expected to vary as follows:Year Rate 0 1000 1 1000 2 1080 3 1050 4 1100 5 1100 You are an investment analyst and the company has approached you for your advice. Required: (a) Evaluate the attractiveness of the project from both subsidiary and parent's perspectives and advise the management of DINGI on whether the investment should be undertaken. (b) SABCO, a South African firm, is considering whether to use money market or forward market to hedge its payment of A$ 30,000,000 for Australian goods in one year. The South African interest rate is 14% while the Australian interest rate is 24%. The spot rate of Australian dollar is SAR 85 while one-year forward rate is SAR 81. Required: Advise SABCO management as to whether it should use money market or forward market hedge. Show your calculations. 1 Apt Financial Consultants CPA Reviews Question Two (a) Hollender Company is a South-African based manufacturer of kitchen furniture. The company's senior management have believed for several years that there is little opportunity to increase sales in the domestic market and wish to set up a manufacturing subsidiary in Tanzania. Because of high transportation costs, exporting from South Africa is not financially viable. The Tanzania subsidiary would involve itself in the construction of a new factory in Dar es Salaam. The projected costs are shown below:Now Year 1 Tshs. '000' Tshs. '000' Land 23,000 Building 16,000 62,000 Machinery 64,000 Initial Investment in Working Capital 15,000 Production and sales in year two are estimated to be 2,000 kitchen furniture at an average price of Tshs. 200,000 (at current prices). Production and sales in each of years 3 - 5 is forecast at 2,500 units. Total local variable costs in Tanzania in year two are expected to be Tshs. 110,000 per unit (at current prices). No tax allowable depreciation exists on fixed assets. All prices and costs in Tanzania are expected to increase annually by the current rate of inflation. The after tax realizable value of the investment in five years' time is expected to be approximately Tshs. 162 million at price levels then ruling. Inflation for each of the next six years is expected to be: South Africa 3% Tanzania 5% The cost of capital for the company is 10%. The spot exchange rate is Tshs. 50/SAR. Corporate tax in Tanzania is 30%, in SA 40%. Taxation is payable, and allowances are available, on year in arrears. The government of Tanzania is anxious to encourage foreign investment and thus allows overseas investors to repatriate an annual cash dividend equal to that year's after tax accounting profit. Cash remitted to South Africa from the subsidiary is not taxable in South Africa. Required: Evaluate whether the Tanzanian subsidiary should be established by Hollender Company. (b) Define the Purchasing Power Parity Theory and discuss the problems it faces when applied in practice. 2 Apt Financial Consultants CPA Reviews Question Three Kipanga Corporation currently has no existing business in German but is considering establishing a subsidiary there. The following information has been gathered to assess this project: The initial investment capital required to start the project would be Euro 50 million to be used to buy plant and equipment. The plant is expected to have a useful life of 10 years and would be depreciated using a straight-line method. The project would be terminated at the end of years 3, when the subsidiary would be sold. Kipanga expect to receive Euros 35 million when it sells the subsidiary. This would be equal to the book value at the end of year 3. The exchange rate of the Euro is expected to be Tshs 0.56 at the end of year 3. However, it is estimated that the risk free interest rate in Tanzania is 12 % and in German is 10%. The price, demand, and variable cost of the product in German are as follows: Year Price (Euro) Demand Variable Cost 1 500 40,000 units Euro 30 2 511 50,000 units Euro 35 3 530 60,000 units Euro 40 The fixed cost, such as overhead expenses, is estimated to be Euro 6 million per year. All cash flows received by the subsidiary are to be sent to the parent company at the end of each year. The German government would impose an income tax of 30%. In addition, it would impose withholding tax of 10% on earnings remitted by the subsidiary. The Tanzania government would allow a tax credit on remitted earnings and would not impose any additional taxes. Kipanga requires a 20% rate of return on this project Required: Should Kipanga accept the project or not? Justify your answer. Question Four A US firm is considering an investment in Tanzania, which will cost TZS 200 million and is expected to produce an income of TZS 30 million in real terms in each of the next 7 years. The firm estimates that the appropriate cost of capital for the project is 8%. Annual interest rates are 9% in Tanzania, 7 7/8% in the US, the spot exchange rate is TZS 1354.50 per US$, and inflation in Tanzania is expected to average 6% per year. At the end of the seventh year the US firm expects to sell the Tanzanian investment to a local firm for TZS 50 million. Required: Evaluate and comment on the economic viability of the proposed project. (Use the NPV Method Centralized Capital Budgeting and Decentralized Capital Budgeting Techniques). Ignore taxation. 3 Apt Financial Consultants CPA Reviews Question Five Loki Technologies of Chicago, Illinois is considering a three-year project in Dar es Salaam. The project has an initial investment cost of US$ 20 million and has no terminal value beyond the final year's cash flow. The current spot exchange rate is US $ 0.2/Tshs. The project's incremental Tshs. Cash flows net of income taxes are projected to be 50, 60, and 70 million Tanzania Shillings in Years 1, 2, 3 respectively. The interest rate on one year government bonds is 5% in the United States and 8% in Tanzania. The required rate of return on the market portfolio is known to be 11% in the United States and 18% in Tanzania. A financial analyst decides the project has an all equality beta of 1.00 vis--vis both the United States and Tanzanian market portfolios. Required: a) What is the project's NPV using the Decentralized Capital Budgeting Technique? b) What is the project's NPV using the Centralized Capital Budgeting Technique? Question Six Mr. Muwanga is a Ugandan investor who is considering investing in the Tanzanian market. A local consultancy firm in Dar es Salaam provided the following information to him: (i) Initial investment will be TZS 200 million in Year 0. (ii) After tax expected cash flows in TZS from Year 1 to Year 4 will be (millions): 100, 125, 150 and 150. (iii) Uganda cost of capital is 16% and income tax on foreign income is 35% on Uganda shillings (UGS) (iv) The current spot rate is 0.560 TZS/1.00 UGS. (v) The Uganda risk-free rate is 6%, while it is 9% in Tanzania. Required: (a) Determine the expected spot rate of exchange for the next four years between the TZS and the UGS. (b) Evaluate the investment proposal to Mr. Muwanga using the net present value approach. (c) What is sensitivity on net present value if the risk-free rate in Tanzania shifts to 8%? Question Seven A US based Multinational Company I considering the establishment of a two year project in Japan with a US$ 8 million initial investment. The company's cost of capital is 12%. The required rate of return on this project is 18%. The project with no salvage value after two years is expected to generate net cash flows of Yen 12 million in year 1 and Yen 30 million in year 2. Assume no taxes and a stable exchange rate of US$ 0.60 per Japanese Yen. Required: What is the net present value of the project in dollar terms? 4