Amity Campus

Uttar Pradesh
India 201303

ASSIGNMENTS
PROGRAM: MBA IB
SEMESTER-II
Subject Name
Study COUNTRY
Roll Number (Reg.No.)
Student Name
Ombe

: International Financial Management

: Mozambique
: IB01272014-2016033
:Marciano da Piedade Isaque Alexandre

INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b)
c)
d)
e)

Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates and need to be submitted
for evaluation by Amity University.
f) The students have to attached a scan signature in the form.

Signature

Date

________________________13-JUN-2015_________

( ) Tick mark in front of the assignments submitted

Assignment

Assignment B

Assignment C

International Financial Management

Assignment A
Ques 1. What is the need of International Financial Management? List out
the difference between domestic Finance & International Finance.
Answer:
As a business grows, so does their awareness of opportunities available in foreign
market. Initially, they may merely attempt to export a product to a particular country or
import supplies from a foreign manufacturer. An understanding of International
Financial Management is crucial to not only the large MNCs with numerous foreign
subsidiaries, but also to the small business engaged in Exporting or Importing.
International business is even important to companies that have no intention of
engaging in International Business. What companies need to know is how their foreign
competition will be affected by movements in Exchange Rates, Foreign Interest rates,
Labour Costs, and Inflation. Such economic characteristics can have an effect on foreign
competitors cost of production and pricing policy. MNCs may have significant foreign
operation driving a high percentage of their sales overseas. The financial managers of
such MNCs must understand the complexities of international finance so that they can
make sound financial and investment decision. In simple words, international financial
management is defined as:

Managing working capital, financing the business, assessing control of foreign Exchange
and political risks and evaluating foreign direct Investment."

List of differences between domestic finance and international finance are

1) The worldwide scale of operations makes the information requirements greater
in case of international finance.
2) The Communications, planning, control and coordination needs are also greater.

3) Different currencies are involved and their relationships change with changing
economic, financial and political developments.
4) The cultural, social and political factors are different in various countries of the
world; adoption to their different environments requires that firms have
different rules for different parts of their operation.
5) The problems of measurement of performances are complicated by the different
circumstances of individual foreign subsidiaries.
6) The terms and conditions of finances and its availability are subject to
continuous change, presenting new opportunities and risks.
7) The proper balance between centralization and decentralization of strategies,
policies and operation is more difficult to achieve in international operation.

Ques 2. i) An investor has two options to choose from:

a) $ 7000 after 1 year b)$ 10000 after 3years.Assuming the discount rate of
9% which alternative he should opt for?

Answer:
A

FV = $7,000

FV = $10,000

Discount rate = 9%

Discount rate = 9%

Time = 1yr

Time = 3yrs

PV = FV/(1+i)n

PV = FV/(1+i)n

PV =$7,000/(1+9/100)1

= $10,000/(1+9/100)3

= $7,000(0.9174)

= $10,000(0.7722)

= $6,422

= $7,722

The investor should take on $7000 after one year because it needs minimal initial capital
of $6,422 compared to $10,000 after three years which needs $7,722.

ii) A person would need USD 5000, 6 years from now. How much
should he deposit each year in his bank account, if yearly interest rate is 10
%?
Answer:
Using the formula FVAn = A((1+K)n 1)/k

The valve (amount to be deposited every yr)

A = FVAnK / ((1+K)n1)
K = 10/100 =0.1
N = 6yrs
FVA6 = $5,000
A=?
A = FVAn / (1+K)n 1)/ K

(1+K) = 1+0.1 =1.1

(1+K) = (1.1)6 = 1.771561
1+K)n 1
= 0.771561
n
(1+K) 1)/ K = 7.71561

= $5,000 / 7.71561
= $648.037
The person should deposite $648.037 every
year.

Ques3. Zain corporation ltd is trying to decide on replacement decision of

its current manually operated machine with a fully automatic version. The
existing machine was purchased ten years ago. It has a book value of $
140000 and remaining life of 10 years salvage value $40000. The machine
has recently begun causing problems with breakdown and its costing the
company $ 20000 per year in maintenance expenses. The company had
been offered $ 100000 for the old machinery as a trade-in on the automatic
model which has a deliver price of $ 220000. It is expected to have a ten
year life & a salvage value of $ 20000. The new machine will require
installation modifications costing $ 40000 to the existing facilities, but it is
estimated to have cost savings in materials of $ 80000 per year.
Maintenance costs are included in the purchase contract and are borne by
machine manufacturer. The tax rate is 40 % .Find out the relevant cash
flows
Answer:
Old Machine:
Economic Life of Machine:

20 Years

Used Life

10 Years

Remaining Life

10 Years

Salvage Value

$ 40,000

Book Value of Machine

140,000

Maintenance Cost

20,000

New Machine
Book Value of Machine

$ 220,000

Use Full Economic Life

10 Years

Cost Savings

80,000

Tax Rate

40%

A originated initial cash outflow

B subsequent cash flow
C terminal cash inflow

Cash flow of the replacement of machine

A. original /initial cash out flow
Cost of new machine 220,000
installation cost

$40,000

Changes in working capital

Salute value of the old machine (trading price of old machine) 100,000
Total net investment 220,000 + 40,000 +100,000 = 360,000

B. subsequent cash flow (any other cash profits)

Cash profit saving = 80,000
Depreciation = 360,000-20,000 = 340,000
10

= 34,000

Net operating cash is 80,000+34,000 = 114,000

C. terminal cash flows

Salvage value of machine (10yrs) 20,000

Ques 4.
a) You have a choice of accepting either of two
Cash flows
Alternative I (in
Alternative II
USD)
( in USD)
6000
11000
6000
9000
6000
7000
6000
5000
6000
3000
lump sum amount

Year
1
2
3
4
5
at the time
zero
(outflows)

24500

28000

Calculate the payback period and give your opinion that which project is
better.
Answer:
Years (I)

Cash

flows($ Cumulative

US)
0

-24500 (q)

6,000

Year (II)

($US)

Cash

flows Cumulative

($US)

($US)

-28,000(q)

6,000

11,000

11,000

6,000

12,000

9,000

20,000

6,000

18,000

3(p)

7,000

27,000

4(p)

6,000

24,000

5,000

32,000

6,000

30,000

3,000

35,000

Payback period for alternative (I) = 4 + (2450024000)/6000

= 4 + 0.0833
= 4.0833 years

Payback period for alternative (II) = 3 + (2800027000)/ 5000

= 3 + 0.2
= 3.2 years.
Since the payback period is shorter for Alternative II, it can be considered is better.

b) Why is the consideration of time important in financial decision making?

How can time be adjusted?
Answer:
Most financial decisions, such as the purchase of assets or procurement of funds, affect
the firms cash flows in different time periods. Cash flows occurring in different time
periods are not comparable. Hence, it is required to adjust cash flows for their
differences in timing and risk. The value of cash flows to a common time point should be
calculated. To maximize of owners equity, its extremely vital to consider the timing and
risk of cash flows. The choice of the risk adjusted discount rate (interest rate) is
important for calculating the present value of cash flows. For instance, if time
preference rate is 10 percent, it implies that an investor can accept receiving USD 100 if
he is offered USD 110 after one year. USD 110 is the future value of USD 100 today at
10% interest rate. Thus, the individual is indifferent between USD 100 and USD 110 a
year from now as he/she considers these two amounts equivalent in value. You can also
say that USD 100 today is the present value of USD 110 after a year at 10% interest rate.

Ques 5. Rico Ltd & Sico Ltd are in the same risk class & are identical in all
respects except that the company Rico uses debt while company Sico does
not use debt. The levered firm has USD 900000 debentures carrying 12 %
rate of interest. Both the firms earn 20 % operating profit on their total
assets of value USD 25 lacs. The company is in tax bracket of 35% &
capitalization rate of 15% on all equity shares.
You are required to compute the value of both the firms using Net Income
approach.

Answer:

Debentures
Rate of
Interest
Operating
Profit
Total Assets
Tax Rate
Capitalisation
Rate

Valuation of Rico Ltd (Levered Firm)

900000
12%
20%
2500000
35%
15%
Amount (in
USD)
500000
108000
392000
137200
254800
1698667

Particulars
Operating Profit
Interest Expense
Profit Before Tax
Tax Expense
Profit After Tax
Market Value of Equity

Market Value of RICO Ltd. Using Net Income Approach

$25,98,667

Valuation of Sico Ltd (Unlevered Firm)

Debentures
Rate of
Interest
Operating
Profit
Total Assets

0
0%
20%
2500000

Tax Rate
Capitalisation
Rate

35%
15%

Particulars
Operating Profit
Interest Expense
Profit Before Tax
Tax Expense
Profit After Tax
Market Value of Equity
Market Value of SICO Ltd. Using Net Income Approach

Amount (in
USD)
500000
0
500000
175000
325000
2166667
$21,66,667

Assignment B
Ques 1.
i)
What are the factors affecting the capital structure of the
company?
Answer:

Internal factors
Cost of Capital: The process of raising the funds involves some cost. While planning the
capital structure, it should be ensured that the use of the capital should be capable of
earning the revenue enough to meet the cost of capital. It should be noted here that the
borrowed funds are cheaper than the equity funds so far as the cost of capital is
concerned. This is because of two reasons. The interest rates (i.e. the form of return on
the borrowed capital) are usually less than the dividend rates (i.e. the form of return on
the equity capital) and the interest paid on borrowed capital is an allowable expenditure
for income tax purposes while the dividends are the appropriate out of the profits.

Risk Factor: While planning the capital structure, the risk factor consideration inevitably
comes into picture. If the company raises the capital by way of borrowed capital, it
accepts the risk in two ways. Firstly, the company has to maintain the commitment of
payment of the interest as well as the installments of the borrowed capital, at a
specified rate and at a predefined time, irrespective of the fact whether there are
profits or losses. Secondly, the borrowed capital is usually the secured capital. If the
company fails to meet its contractual obligations, the lenders of the borrowed capital
may enforce the sale of assets offered to them as security. Hence the risk on the part of
the company is more for debt compared to equity.

Control Factor: While planning the capital structure and more particularly while raising
additional funds, the control factor plays an important role, especially in case of closely
held private limited companies. If the company decides to raise the long term funds by

issuing further equity shares or preference shares, it dilutes the controlling interest of
the present shareholders / owners, as the equity shareholders enjoy absolute voting
rights and preference share holders enjoy limited voting rights. The control factor
usually does not come into the picture in case of borrowed capital unless the lender of
the long term funds, i.e. Banks or financial institutions, stipulate the appointment of
nominee directors on the Board of Directors of the company.

Constitution of Company: While deciding about the capital structure, the constitution of
the company plays an important role. In case of private limited company, the control
factor may be more important while in case of public limited company, cost factor may
be more important.

Characteristics of Company: Characteristics of the company, in terms of size, age and

credit standing play very important role in deciding capital structure. Very small
companies and the companies in their early stages of life have to depend more on the
equity capital, as they have limited bargaining capacity, they cant tap various sources of
raising the funds and they do not enjoy the confidence of the investors.
Similarly, the companies having good credit standing in the market, may be in the
position to get the funds from the sources of their choice. But this choice may not be
available to the companies having poor credit standing.

Stability of Earnings: lf the sales and earnings of the company are not likely to be stable
enough over a period of time and are likely to be subject to wide fluctuation, the risk
factor plays more important role and the company may not be able to have more
borrowed capital in its capital structure as it carries more risk. However, if the earnings
and sales of the company are fairly constant and stable over the period of time, it may
afford to take the risk, where the cost factor or control factor may play important role.

Attitude of the Management: lf the attitude of the management is too conservative; the
control factor may play an important role in capital structure decision. If the policy of
the management is liberal, the cost factor may get more importance.

Objects of Capital Structure Planning: While planning the capital structure, the following
objects of the capital structure planning come into play.

To maximize the earning per share of the company,

To issue the transferable securities and this can be ensured by listing the
securities on the stock exchange.

To issue the further securities in such a way that the value of shareholding of the
present owners is not affected.

External Factors
General Economic Conditions: While planning the capital structure, the general
economic conditions should be considered. If the economy is in the state of depression,
preference will be given to equity form of capital as it will be involving less amount of
risk. But it may not be possible always as the investors may not be willing to take the
risk. Under such circumstances, the company may be required to go in for borrowed
capital. If the capital market is in boom and the interest rates are likely to decline in
further, equity form of capital may be considered immediately, leaving the borrowed
form of capital to be tapped in future. It may also be possible to raise more equity
capital in boom as the investors may be ready to take risk and to invest.

Level of Interest Rates: If funds are available in the capital market, only at the higher
rates of the interest, the raising of capital in the form of borrowed capital may be
delayed till the interest rates become favorable.
Policy of Lending Institutions: If the policy of term lending institutions is rigid and harsh,
it will be advisable not to go in for borrowed capital, but the equity capital form should
be tapped.

Taxation Policy: Taxation policy of the Government has to be viewed from the angles of
both corporate taxation and as well as individual taxation. The return on borrowed
capital i.e. interest is an allowable deduction for income tax purposes while computing
taxable income of the company, while return on equity capital i.e. dividend is not
considered like that as it is the appropriation out of the taxable profits. As far as
individual taxation is concerned, both interest as well as dividend will be taxable in the
hands of lender of the capital subject to specified deductions available for the purposes.

Statutory Restrictions: The statutory restrictions prescribed by the Government and

various statutes are required to be taken into consideration before the capital structure
is planned. The company has to decide the capital structure within the overall
framework prescribed by the Government and various statutes.

ii)

The company raised preference share capital of $ 100000 by the

issue of 10% preference share of $ 10 each. The floatation cost is
1%. Find out the cost of preference share capital issued at i) 10%
premium ii) 10% discount

Answer:
Calculation of Cost of Preference Share Capital
Particulars
Preference Share Capital
Value Per Share
Rate of Dividend on Preference Share
Floatation Cost
Prefence Dividend Per Year
Cost of Preference Share if issued at 10% Premium
No. of Preference Shares Issued
Price per share @ 10% Premium
Cash inflow by issuing shares
Less: Floatation Cost
Net Proceeds by issuing Preference Capital

Amount
$1,00,000
10
10%
1%
$10,000

10000
$11
$1,10,000
$1,000
$1,09,000

Cost of Preference Share Capital if issued at 10% Premium

9.17%

Cost of Preference Share if issued at 10% Discount

No. of Preference Shares Issued
Price per share @ 10% Discount
Cash inflow by issuing shares
Less: Floatation Cost
Net Proceeds by issuing Preference Capital
Cost of Preference Share Capital if issued at 10% Discount

$10,000
$9
$90,000
$1,000
$89,000
11.24%

Ques 2. A company has the following amount and specific costs of each
type of capital:
Book Value (
in $)
100000
600000
200000
400000
1300000

Types of Capital
Preference
Equity
Retained Earnings
Debt
Total

Market Value
110000
1200000
380000
1690000

Specific Costs
8%
13%
5%

Determine the weighted average cost of capital using

a) Book value weights
Answer:
Calculation of Weighted Average Cost of Capital
Types of Capital

Specific Cost

Book Value (in $)

Market Value (in $)

Preference Capital

8%

100000

110000

Equity Capital

13%

600000

1200000

200000

Retained Earnings

Debt

5%

400000

380000

Calculation of Book Value weights to determine the WACC

Types of Capital

Specific Cost

Book Value (in $)

Weights

Preference Capital

8%

Equity Capital*

0.0769

(600000+200000)=80000
13%

Debt

100000

5%

0.6154
400000

0.3077

*Equity Capital = Retained earnings + Surplus & Reserve + Paid Up Capital

Weighted Average Cost of Capital using Book Value = 0.0769*8 + 0.6154*13 +
0.3077*5
= 10.15%
b) Market value weights.
Answer:
Calculation of Market Value weights to determine the WACC
Types of Capital
Specific Cost
Market
WeightsValue (in $)
Preference Capital
8%
Equity Capital 1*
13%
Debt
5%
1* Equity Capital = Retained earnings + Surplus & Reserve + Paid Up Capital
Weighted Average Cost of Capital using Market Value

110000
1200000
380000

0.0651
0.7101
0.2249

10.88%

How are they different? Can you think of a situation where the WACC
would be the same using either of the weights?
Answer:
Calculation of Weighted Average Cost of Capital using market value weights is different
from using book value weights. Since, we know that there is always a difference in the
book value of the equity compared to its market value, which leads to different
Weighted Average Cost of Capital.
WACC using either of the weights could be same only if the market value and the book
value are same. It means that there is no difference in the market value of the Equity,
Preference Capital & Debt compared to its book value.

Ques 3 Calculate the degree of operating leverage (DOL), degree of

financial leverage (DFL), degree of combined leverage (DCL), for the
following firms:

Output(units)
Fixed Costs (USD)
Variable cost per
unit
Interest on
borrowed funds
Selling price per
unit

Firm A
90000
10000

Firm
B Firm C
35000 200000
16000
2000

0.2

1.5

0.02

4000

8000

0.6

0.1

Answer:

Particulars
Output
Selling Price Per Unit
Sales
Fixed Cost
Variable Cost
Interest on Borrowed Funds

Firm A
90000
0.6
54000
10000
0.2
4000

Firm B
35000
5
175000
16000
1.5
8000

Firm C
200000
0.1
20000
2000
0.02
0

Calculation of Operating, Financial & Combined Leverage

Particulars
Firm A
Firm B
Firm C
Sales
54000 175000
20000
Less: Variable Cost
18000
52500
4000
Contribution Margin
Less: Fixed Cost

36000
10000

122500
16000

16000
2000

Net Operating Income (EBIT)

Less: Interest on Borrowed Funds

26000
4000

106500
8000

14000
0

Earning/Profit Before Tax (PBT)

22000

98500

14000

Formula
Degree of Operating Leverage =(Contribution Margin/Net Operating
Income) or (Percentage Change in EBIT/Percentage Change in Sales)
Degree of Financial Leverage = (Earning before Interest & Taxes / Earning
before Taxes) or (Percentage change in EPS/Percentage change in EBIT)
Degree of Combined Leverage = (Degree of Operating Leverage * Degree
of Financial Leverage) or (Percentage Change in EPS/Percentage Change
in Sales)
Firm A
Degree of Operating Leverage
Degree of Financial Leverage
Degree of Combined Leverage

Firm B
1.38
1.18
1.64

Firm C
1.15
1.08
1.24

1.14
1
1.14

Case Study
Merck International is a pharmaceutical company. It is not currently selling
its product in India. However it is proposing t establish a manufacturing
facility in India in near future.
The Company to be set up in India is to be a wholly owned affiliate of Merck
International which will provide all funds needed to build the manufacturing
facility. Total initial investment is estimated at Rs.50,000,000. Working
capital requirements estimated at Rs. 5,000,000, would be provided by the
local financial institution at 8 percent per annum, repayable in five equal
installments beginning on 31st December of the first year of operation. In
the absence of this concessional facility, Merck would have financed these
requirements by a loan from its bankers in United States at 15 percent per
annum.
The cost of the entire manufacturing facility is to be depreciated over the
five years period in straight line method basis. At the end of fifth year of its
operation all remaining assets would be taken over by a public corporation
to be designated by the government of India with no compensation.

Sales and selling price are presented in the table below:Year

Sales in Units

Unit Price(Rs)

2,00,000

1,000

2,25,000

1,500

2,50,000

1,800

2,75,000

2,000

3,00,000

2,200

Variable costs are Rs. 600 per unit in year 1 and are expected to rise by
15% each year.
Fixed Cost other than depreciation are Rs. 20 million in year 1 and is
expected to rise by 10% per year.
Other Information:

All profit after tax realized by the affiliate are transferable to the parent
company at the end of each year. Depreciation funds are to be blocked
until the end of year 5. These funds may be invested in local money market
instruments, fetching a tax-free return of 15%. When the operating assets
are turned over a local corporation, the balance of these funds including
interest may be repatriated.
The income tax rate in India is 48% but there are no with holding tax on
transfer of dividends. Dividends received by Merck International in the
United states would be subject to 50% tax.

Merck International uses a 20% weighted average cost of capital for

evaluating domestic projects similar to the ones planned in India. For
Foreign projects in developing countries a 6% political premium is added.

Calculate the NPV and IRR for the project from the standpoint of the parent
company. What are your recommendations for the proposal?

Answer:
Total initial investment Rs.50, 000,000 Merck International
Working capital (India) Rs.50, 000,000 by commercial institution

in India @ 8% loan

per annum which is payable in 5 equal investments beginning 31st December of the first
year of operation.
OR form USA @ 15% interests.
Depreciation for 5 years @ straight line method basis
After 5 years nationalizing of the project in India with no compensation and all the
remaining assets will be taken.

Year

Sales Unit

Unit price

200,000

1,000

22,5000

1,500

250,000

1,800

275,000

2,000

300,000

2,2000

Profits after = Transferred to USA

Depreciation is to be blocked till end of year 5
Provision for depreciation to be terminated in local money market @ tax free return
15%
WACC (in USA) =20%
WACC (foreign project) = 6%+20=political premium
IRR=TIV=TB
i) R 50,000,000
ii) WC=5,000,0000(8% per interest)
FV=PV (1+r) n
FV=5,000,000(1.08)5
FV=7,346,640.384
WC=7,346,640
So annual installment =1,469,328
Total initial investment =55M

Year

Sales in Units

Price

Sales revenue Available Cost

200,000

1,000

200,000,000

120,000,000

225,000

1,500

337,500,000

155,250,000

250,000

1,800

450,000,000

198,375,000

275,000

2,000

550,000,000

250,944,375

300,000

22,000

660,000,000

314,821,110

Fixed Costs

Earnings throughout the year

20,000,000

60,000,000

22,000,000

160,250,000

24,200,000

22,7425,000

26,620,000

272,435,625

29,282,000

315,998,000

Manufacturing facility=50,000,000
Depreciation =value of manufacturing facility
No of years
50 = 10M

Accumulated value of depreciation =A ((1+K) n-1)

K
=10((1+15%)5-1)
0.15

At the end of 5 years Depreciation interest = 67423812.5

Year

Earning

Depreciation

48% Indian

Net earning

taxation

Merk international
net earnings

60,000,000

10M

24M

26M

13M

160,250,000

10M

(72.12)

78.13M

39.065M

227,425,000

15M

(104.364)

113.061M

56.5305M

272,435,625

15M

(125.9691)

136.466552M

68.23326

315,898,000

10M

(146.83104)

159.0669M

79.53M+67.4233/2

79.5M+33.712M
113.212M

Discounting factor

Present value

Initial investment

1/1.26)5

4.0935M

-45.906

1/1.26)4

15.5M

-30..4065

1/1.26)3

28.26M

-2.1465

1/1.26)2

42.979M

-40.823

1/1.26)1

89.874M

Net present value=180.7065M

28.26M+42.979M/2=35.6195
IRR=35.6195/180.7055
0.1971135
IRR=19.71%

Assignment C
1: B

21: I

2 :B

22: I

3: D

23: I

4: A

24: II

5: D

25: IV

6: D

26: II

7: C

27: IV

8: C

28: I

9: A

29: III

10: A

30: II

11: B

31: I

12: A

32: II

13: B

33: I

14:D

34: II

15: I

35: II

16: 1V

36: I

17: II

37: I

18: II

38: I

19: IV

39: II

20: I

40: II