Financial Markets and Economics - Assignment Example

Question a. In order for TCC to proceed to the acquisition of the mine located in Indonesia, there are a few issues that should be considered thoroughly before any relevant decision. First of all, according to the Indonesian law [1] every project which is of national importance has to be guarded by security forces the salaries of whose have to be paid by the owner of the site. On the other hand, the issue of the difference in currency should also be taken into account. The structure of the line of communication between the Indonesian mine (area of sub-production) and the buyers should be also examined and designed very carefully. As of the staff of the Indonesian mine, a thorough evaluation of the existing resources should be conducted regarding all levels of the working area (from the management team to the worker). b. The acquisition should create a competitive advantage for TCC mainly for the following reasons: 1. This mine should be the first offshore production base for TCC, a fact that could help towards the reduction of the company’s dependency on domestic mines, 2. The transport of the material from the specific mine is easier due to the absence of issues like the rail or port bottleneck, 3. Currently, the mine has a positive performance with a tendency for more growth (an export authorization for 20% more tonnage was granted this year), 4. The acquisition of the Indonesian mine could be achieved in a rather low price for TCC. As it has been noticed [2] ‘with the financial crisis that has been occurred since 1997, much of the Indonesian companies are in need of fresh investment and/or partnership in their business; this also results in the low value of the Indonesian companies, waiting for prospective buyers’. c. The specific acquisition could lead to a few negative results for TCC. These could be summarized as follows: 1. The Indonesian market is a rather unstable market. This means that the chances for profit can be quickly replaced by significant losses, 2. The specific mine is only open cut and a possible expansion of its capacity is depended from the government’s relevant decision, 3. In any case, it will be necessary for the mine’s staff to be training in order to get familiar with TCC rules and targets and the use of its technologies, 4. The acquisition will create financial obligations for TCC which will have to be measured in advance calculating not only the cost of the acquisition but also of the operation of the acquired mine. d. Although the specific acquisition includes both advantages and risks, it seems that TCC should decide to proceed on the specific commercial decision. This assumption can be supported by the fact that although the acquisition will increase the company’s debt (borrowing to acquire the Indonesian mine) it will also give the chance to TCC to activate in the international markets and to get independent from its local market. On the other hand, the existing staff could be trained in practice by the current employees of TCC and the rules of the company could be applied gradually offering time to the personnel of the acquired company to get adapted to the new corporate environment. Question 2 a. (i) At a first level, TCC seems to be eligible to be listed in the Australian Stock Exchange (ASX). More specifically [3] it is an entity with constitution (condition 1, 1a). Furthermore, the company has to satisfy the rules included in condition 7. According to this condition the company (entity) has to meet either of the following criteria: a) there must be at least 500 shareholders each having a parcel of the main class of securities with a value of at least $2000 or b) there must be at least 400 shareholders (owning also securities of at least $2000). Relating the last condition the number of the company’s shareholders is not clearly mentioned in the case, and the completion of this criterion is an issue of examination. The next condition (8) states that the company must satisfy either the profit test (which is described in rule 1.2) or the assets test (in rule 1.3). Regarding these tests, the company can be considered as eligible to be listed in the ASX. More specifically, the firm is a going concern (1.2.1), its business activity remains the same the last 3 financial years (1.2.2) and its net profit the last year was $120 million (the relevant requirement of the article 1.2.4 is $1 million – as aggregated profit for the last 3 financial years). The criterion of the existence of tangible assets of specific value (minimum $2 million) is also covered by the firm (1.3.1). (ii) Two of the obligations that TCC should meet in order to be listed in ASX could be the following: a. the entity must be a going concern; this rule is also satisfied if the entity is the successor of a going concern, b. the firm’s main business activity at the date it is admitted must be the same as it was during the last 3 full financial years [3]. (iii) The decision of TCC to enter ASX should not be influenced by any financial or other event. In fact the specific decision (of entering ASX) would be independent from the decisions and the activities of the general corporate environment and should be decided only in accordance with the existence and the completion of the criteria for the achievement of such a target. b. (i) According to the Australian Government’s 2005/06 Mid-Year Economic and Fiscal Outlook (MYEFO) the business investment in 2005/06 will be increased to 8% (from 7.7% of 2004/05) regarding the area of non-dwelling construction whereas in the area of machinery and equipment the relevant figure is estimated to be 13 % (instead of the 16.5 % of 2004) [4]. As a total, the business investment is expected to be increased in a percentage of about 11 % (whereas in 2004/05 period the total business investment was increased by 12.2%). The above figures show a trend of stability of the domestic business market, an issue which have to be considered by TCC before any investment decision. (ii) As of the Wage Price Index [4], this is expected to reach the 4 ¼ for 2005/06 whereas for 2004/05 the relevant figure was 3.8. It seems that the wages in Australia show points of increase which have to be taken into account by TCC while deciding the place in which it is going to expand its activities (in Australia or in another country). (iii) The expected economic growth in 2006 for China is 8 ¾ whereas for Other East Asia the relevant figure is formulated to 5. It seems that the rate of development in China will be more intensive comparing the rest of Asia and this issue has to be considered by the company when designing the plan of its potential markets. (iv) Regarding the employment growth, this has been estimated to 1 ¾ in 2005 and 2 in 2006. The above figures show that the increase in the employment market will be rather slow, and this is a potential issue that can be used from TCC when formulating its human resources strategy but also when deciding the place in which it is going to establish its centre of activities. c. (i) In case that RBA were to tighten its monetary policy, the consequences on all business activities would be severe. More specifically, the funding of the particular entrepreneurial activities would be limited and the whole corporate activity in the country would have to be limited in certain borders. (ii) Especially regarding the impact of the above decision to the activities of TCC, it should be noticed that the most severe consequence for TCC would be the fact that TCC would have to stop its expansion and should try instead to develop its performance in the domestic market in order to gather the capital available to proceed to the establishment and operation of new sites of activities. Question 3 a. A possible explanation for the answer of the Bank could be the fact that the company is currently in a period of high performance (as it is stated in the letter of the bank). Moreover, this fact is used by the bank as a justification for the rejection of James request for extension of debt, because it is considered that there may be a risk regarding the specific project (purchase of Indonesian mine). This assumption can be supported by the fact that if the specific purchase was a real investment opportunity then the company could have supported it (with the money of the relevant attempt to be available). Instead the company prefers to extend its debt and not to cover the whole investment initiative by its own resources. b. (i) The hybrid security is a ‘synthetic financial instrument formed by combining two or more individual financial instruments, such as bonds with warrants’ (Oxford Dictionary of Business, 252) (ii) TCC could secure the additional funding required for the acquisition of Indonesian mine through the use of junk bonds. It should be noticed that these bonds offer a high rate of interest because they ‘carry a higher than usual probability of default’ (Oxford Dictionary of Business, 287). The above financial instrument is proposed as it has already be used in a lot of acquisitions (mainly in U.S.A.) and has proved an appropriate tool for gathering the necessary capital for the achievement of a planned acquisition. c. In case that such a financial instrument would be used for the funding of the Indonesia mine’s acquisition, the TCC’s shareholders could be exposed to severe risks. On of them, could be the differentiation in the exchange rates which can lead to significant changes of the capital owned for the above transaction especially when there is no specific arrangement included in the relevant negotiating contract. Question 4 a. A fixed interest security is a type of security that ‘gives a fixed stated interest payment once or twice per annum’. Two main characteristics of fixed interest securities are the following: 1. they tend to be ‘particularly poor investments at times of high inflation as their value does not adjust to changes in the price level’, on the other hand, 2. their prices tend ‘to move inversely with the general level of interest rates, reflecting changes in the value of their fixed yield relative to the market’ (Ox. Bus.Dict., 216). b. The reason is that long – term financial instruments have usually higher rates as they also include a higher risk (like the project in case). It’s for the specific reason that the most appropriate financial instrument for the funding of the particular project could be a long –term one (as the risk in the specific purchase can be considered as high). c. The main characteristic of the 90-day bill is that bill payment is free for the first 90 days. After 90 days the bill payment will be free if a specific average daily balance (stated in advance) is maintained. The economic factor that has the most significant influence on the specific financial instrument is the monetary amount which has to be deposited in the bank prior to the beginning of the scheme. More specifically, in order for the above yield to operate in accordance with its role, a significant amount of money have to be deposited in the bank. d. Formula for the conversion: effective annual rate = (1 + i/m)m – 1 Where I is the nominal annual interest rate and m is the number of compounding periods. eff.an.rate = (1 + 0.0560/12)12 – 1 = 11.04 eff.an.rate = (1 + 0.0565/12)12 – 1 = 11.05 eff.an.rate = (1 + 0.0568/12)12 – 1 = 11.05 eff.an.rate = (1 + 0.0570/12)12 – 1 = 11.05 e. P = 1,000,000 x 365/ 365 + ([5.64 x 90] / 100)= 365,000,000/370.076 = 986,283.89 The purchase price of the above described 90-day bank bill is $ 986,283.89 f. Question 5 a. The global economic growth in 2006 will be influenced mainly by the ‘upward trend in oil, coal and iron ore prices’ [5]. More specifically, according to the November 2005 Statement on Monetary Policy of the Reserve Bank of Australia ‘the increase in world oil prices has occurred as part of a more general rise in global commodity prices over recent years’. On the other hand, it is also stated that ‘world prices of coal, iron ore and a range of other resources have risen sharply as a result of strong growth in global demand’. As of the influence of these trends to the Australian economy it is assumed that ‘these trends are to Australia’s advantage, providing a substantial boost to the country’s terms of trade’. According to a relevant publication of OECD (The Future of the Global Economy, Towards a Long Boom?) the growth of global economy seems to be influenced by a series of variables like the social and cultural characteristics of each society as they can applied in the relationship of the specific country with the international community. b. (i) The economic growth of USA in 2006 is expected to be 3 ½ % [4]. This number if compared with the one of 2004 (4.2 %) shows that the influence of USA in the global economy is remaining on competitive levels and for that reason the turbulences occur in its financial market should be considered thoroughly before proceeding on an important investment decision in the international community. (ii) According to a relevant forecast [4] economic growth of China in 2006 is estimated to reach the 8 ¾ % which is a really impressive percentage comparing the similar percentages of the other countries. China has secured its position in the global market and the financial strength which characterizes its internal market has a significant influence on the investors’ decisions around the world. (iii) Japan seems to be in a phase of slow development with the forecast for its economic growth to be limited to 2 in 2006 (comparing the 2.3 % of 2004 and the 2 ½ of 2005). However, the influence of the country to the formulation of investment strategies globally remains in significant levels. It should be taken into account in any case that Japan has been in a continuous and advanced development in all scientific areas and the retention of the growth in specific levels for a long – term period can be considered as the most appropriate strategic decision. c. The global economic growth in 2006 is going to face a series of challenges. An indicative part of this ‘downside’ might include the following two elements: i) the constant changes in interest rates around the world which create significant difficulties to the pricing of services and products that are offered globally, ii) a second downside could be the fact that the political environments which are established in each particular country tend to be unstable presenting at the same time a high level of turbulences in the relevant financial markets. Such a fact, could create obstacles to the economic growth of an individual, a company or a state in the international market. d. The high inflation will lead to the differentiation of the cost of the whole project (as was estimated during the negotiations period) and as a result the funds for the financing of the relevant initiative could be proved inadequate. Taking into account that the local bank does not offer financial support for the specific investment decision (acquisition of mine in Indonesia), the inflation should be examined thoroughly before proceeding to any kind of commercial arrangement. Question 6 a. If the AUD would been appreciated, then the decision of TCC to acquire the Indonesian mine and operate actively in Indonesia could be formulated under the influence of the following two factors: i) if the national currency had been appreciated then the prices in all the materials would follow a similar direction. Such a fact could lead to the need for re-structuring of the company’s financial planning regarding the specific acquisition as the cost related with this investment decision would be increased to a significant level, ii) on the other hand, an appreciated national currency could lead to the reduction of the real price of the product selling to both the internal and the external markets. As a result, the profits of the company could be reduced to a significant level whereas its expenses (as stated above) would be increased. b. The AUD could be possibly moved above 80 US cents under the influence of the following conditions: i) in case that the inflation was increased and the relevant pressures to the national currency became more intensive (as the increase of inflation could be resulted from the increased in prices of goods/ services or the limitation of the availability of certain goods/ services) , ii) if the liabilities of the country were also increased then such a solution could help to reduce the international debt, iii) if the global market is facing conditions of intensive turbulences then the domestic market is going to be influenced and the value of the national currency should be considered as one of the most common targets. c. The application of fixed exchange rate in countries that characterized by a rapid economic growth could be considered as a rather unachievable task. The reason for such an assumption is the fact that for the countries that present a high and rapid rate of economic growth, such an application could have significant consequences for all the parties involved. This result could furthermore be based on the following series of events: 1. in these countries the financial growth is calculated using all the particular parameters and variables which can have an influence on the final result. Regarding such an aspect, the use of fixed exchange rate could prevent the development of the company both to the financial but also to the general industrial market. 2. On the other hand in countries that are characterized by persistent current account surpluses, the use of fixed exchange rate could lead to a false calculation of the domestic financial performance, with all the negative consequences that such an issue could have. d. (i) The primary factor which influenced the increase in the terms of trade to record highs was the large increases in iron ore and coal export prices. More specifically, the increase in the price of the above materials reached very high levels and the relevant influence on the country’s commercial activity was an unavoidable situation. (ii) The importance of the terms of trade for the domestic market of every country is very important. Specifically, for Australia, the extremely high levels in the terms of trade could enhance the country’s economic growth as well as its financial stability and its power towards its competitors. References Oxford Dictionary of Business, Oxford University Press, 2002, Oxford http://www.corpwatch.org/article.php?id=13226 [1] http://64.233.179.104/search?q=cache:gus9k2PwnmYJ:www.haeys.com/uploadedfiles/library/file_01183020030415.pdf+Indonesian+company+law+and+acquisition&hl=en&ct=clnk&cd=2&lr=lang_en [2] www.asx.com [3] www.budget.gov.au [4] www.rba.gov.au [5] Read More