Surabaya Advisors, a private equity firm located in Indonesia, would like to purchase a noodles manufacturer in Malaysia named Genting Mi. Based on their calculations and preliminary analysis, they forecast that Genting Mi will produce free cash flow of 145 million Ringgit in 2023. They also further assume that this free cash flow will grow constantly at 12% per annum.
They plan to hold the company for four years and then sell. They have worked out that they would be able to sell at the end of this period for 8.5 times FCF based on market assumptions for the industry. The spot rate for Indonesian Rupiah/Ringgit is 0.00028 and Indonesian inflation is 15% whereas that for Malaysia is 11.5%. Surabaya requires a 25% return on investment:
a) What would be the value of Genting Mi if the Ringgit exchange rate remained unchanged over the four year period?
b) Advise how Surabaya Advisors could hedge the exchange rate risk for this investment. Discuss with reference to futures, forwards, swaps and options to illustrate your response?