Business in Asia-Pacific - Assignment Example

Business in Asia-Pacific In the evaluation of the joint venture, the analysis of the cash flow for the current and previous financial periods is crucial. In the evaluation of the joint and mutual venture which is proposed appears to have been done especially by the company management. The flow of the cash proceeds is to be measured through calculation on the current information that is in existence. The best criteria for calculation is through the use of Net Present Value (NPV) as the capital budgeting technique due to its incalculable popularity in measuring the best and most appropriate criteria for investment. This can be done through preparation of the net previous and cash flow which are used in the estimation of the capital cost that is best estimated by the WACC method (Weighted Average Cost of Capital). This can be determined as indicated below: Debt cost is stated in our case and is given as 6%, and the Equity coast is taken as 10%. The shareholders have an option of either using the equity for financing or debt financing depending on their appropriateness. The debt ratio: Equity ratio is taken as 0.6:04 as given in our case. This means that 60% is used to raise funds from the public through IPO and 40% from debt-financing. The financial leverage of the company is 60%. We, therefore, need to calculate the WACC that is given as indicated below. Debt cost X % of debt + Equity cost X % of equity KE/V+KD/V WACC=12% X 0.880 + 6% X 0.12 We get the WACC as 0.1128 or 11.28% given from the above calculation. After computation of the capital cost the statement of cash flow statement. The flow for the year 0 and year 1 is taken as -€ 1,200,000.00 and -€ 800,000.00 respectively as it is mentioned that the flow in the form of investment .A percentage of 15.00% has raised this cash flow annually. The business cost of operating will be deducted from the inflow of cash. There is no requirement for deduction of the operating expenses from the inflow of cash. Additionally the incurred depreciation is adjusted. Operating expenses will increase by a rate of 2.5%, and the inflation of 2.5% is also considered there is tax adjustment by 30% that is applicable to the statement of cash flow. It is crucial to note that the sterling pound is used in conversion to the Euros. This is purposeful for calculation of the net cash flows for the period. The spot rate which is given as £0.7320/€ has been considered for conversion. It is assumed that the rate of conversion for the time remains unchanged over the studied period, which is four years. The statement of cash flow prepared for the joint venture is as indicated below. Years 0 1 2 3 4 Investments -1,200,000 8462400 Euros Inflows 900000 1035000 1190250 1368787 Pounds Inflows 450000 517500 595125 864394 ( Operational Costs) 235000 240875 246896 253069 Net Euros Inflows 665000 794125 943353 1115718 Pounds to Euros conversion 378450 435217 500500 575575 Tax rate paid -1200000 5060 999,046 999,046 323558 Cashflows 1 0.92936 0.92936 0.86372 1367735 Net Present Value -1200000 47,026 47,026 862,901 1020358 Total Cash Flows 1669691 This corporation has a vast capitalization of the market with at least 2.5 B Euros and sales turnover of 60 M Euros annually globally and gains over the last 5 considered years, with an average of 1.8 M Euros annually. There is an optimistic expectation 5% growth. The subsidiary company’s ratio of gearing is close to 35% of a debt close to 6.5-7M Euros. This indicates that the XP may be able to increase its debt level due to the lower debt cost in comparison with equity. Profits of around 1.8 M Euros are noted. It is apparent that the Profit/Sales is t at least 0.03. This means that the EAT is 3% of the entire sales. Apparently, the firm is to consider investing 1.2 M Euros each financial period thus making the retained earnings be exhausted in the decision of joint venture. These little profits are as a result of increased competitiveness and greater regularities making it difficult for financial businesses in raising extra capital for additional investments (Madura 2002). Also importantly, the business is currently having concerns with its subsidiary company’s underperformance. In summary, the forecasts and the calculated margins indicated after considering the transaction costs involved, and other appropriate axioms made such as the consistency of the spot rate over the period. However, these postulations and forecasts are considered in addition to the analysis and consulting with experts. Another benefit that is evident from the joint venture operations is that the company will have a tax advantage. The decision on the option of a joint venture is that continuation of activities with Germany will attract double taxation that will lower the net profit (Jeff 2002). This shows that that applied taxation method on the company’s profits in Germany will evade a significant tax as the profit earned as pounds cannot be taxed but the shortcoming is the transaction costs in conversion of currency. Another important point is that the cash flow has been estimated based on WACC. The reasons for doing this is because that the method provide an important basis for making computations in risky investments, estimation of capital cost and in the estimation of stockholders return. Additionally the equity cost is higher in comparison to debt cost, thus greater competitiveness of the corporate as indicated. Key operational and strategic challenges XP Plc SMT faces when considering re-domiciling The business may experience various operation challenges including the strategic loopholes. To re-domicile the parent enterprise located in France to another location in Monaco (Jeff 2002). This may lead to a positive or negating impact over time because if the firm may be unable to close down the current transactions and meet its working capital requirement. Additionally the company might experience various issues on its decision on the strategy for sorting out its share in the market which the business wants to target. To start with, XP Plc is going to part with close to 5million Euros to facilitate there-domiciling to the locality in Monaco which is a big amount for this growing company and will likely to reduce the profitability of the business. Apparently, one of the key advantages as a result of redomiciling will make the company enjoy a greater customer base for its growth in Monaco (Cheol et al, 2011). For instance, this will not make the firm benefit enormously. This in turn will lead to an extra burden on XP Plc. Another significant tip for consideration is corporation may lose substantially in other gains which would take the root country for the company in France. This will make the order of benefiting when the company re-denominative may be unable to gain as they had expected (Cheol et al., 2011). Secondly, when the companies redomicile its operations to Monaco, the business may end up having the company to forgo extra taxation gains that XP Plc may currently be benefitting in France as the base. For instance, it’s taken into consideration that the company will not be having additional tax contracts and the same covenants will other nations in the partnership of trade with France. This benefit is only possible if the parent corporation made its registration in the base country which for this case is France (Cheol et al., 2011). Analysis for such is, therefore, a requirement. Apparently the company ought to be forced to open up an additional office for its operation in Monaco as its major business transactions ought to be performed for completion of their re-domiciling (Jeff 2002). This may be unfavorable, and it will need other activities that are unproductive which are closely related to its current operations. Another very element of noting is a greater capital requirement leading to additional costs for redomiciling. Additionally the costs of operation will be increased as a result of fresh beginning with the firm currently the parent business which instead should be the subsidiary. Thus, it is important to note that there will be additional costs as a result of redomiciling. The additional expenses will be the overhead to the corporation and could result in the capital base of the company as portrayed in the statement of the financial position. This may negate the company’s capitalization in the market. These elements are very crucial which requires to be put into consideration by the management before they plan and decide the option of redomiciling. For instance, in this case of the fresh event of company’s redomiciling in consideration with potential opportunities in Monaco might awaken its competitors in the realization of the posed threats thus increasing the market competition (Jeff 2002). There is also a possibility of arguing about presence of already a competition for customers in the market, and new entrants will further lead to decreased profit margins. The region which this company wants to redomicile is where it is currently earning their primary revenues and other gains thus increased competitiveness will exert pressure to the firm in operate in diversified portfolios (Cheol et al, 2011). Therefore, redomiciling will make the business to deviate from previous planning and decisions, and this may affect the company’s mission. Additionally this company has other plans of risk diversification and alleviation as the idea of redomiciling is taken and put into consideration (Cheol et al, 2011). These plans are supported by the status and the current company’s financial position. The idea of redomiciling will have to be put into consideration in the two mannerisms. To start with, it backs planned investment and expenditure in other geographical localities. Interestingly, it is not a loophole for XP Plc and will expand the output in the countries in Asia. Other various aspects that are very vital are regulatory changes, the stability of the country politically among others. Additionally, the option of redomicile may lead to a condition where the regulatory changes may negate the revenue and profit volumes, and the expected benefit may lack as a result. The firm is required to conduct market survey and research in Monaco and this is going to affect the operations of the company that are currently occurring in the European market. This affects the decisions of the firm about investments in future. In conclusion the option of redomiciling will have a negative impact on the profit and company’s reserves (Cheol et al, 2011). Additionally the company is growing to have a lower gearing and thus reduce some of its transaction or abandon some of the investments. It becomes therefore of essence for the business enterprise look and the both the opportunities and the bottlenecks that exist before it comes with the option of redomicile (Jeff 2002). Conversely, the company is required to conduct a study research on the effects and impacts on the sub-branches and business subsidiaries and their decisions on planned investments and lastly decided to implement them. Sources of finance to the company and their considerations in Asian market The Company can obtain its finance from various sources either through debt or equity capitalization (Cheol et al, 2011). These options of financing are categorized into internal, short-term, long-term and external sources (Jeff 2002). Additionally other various factors are put into consideration and may include the terms of payment such as the maturity period of the payment, the regular principal payments and the required opportunity cost of capital or the hurdle rate that is charged and the payback periods. When the company’s management put into consideration of these factors it may opt for various financing options or consider diversification of the risk that may be associated to the capital cost, that is, WACC. The business may opt to use internal funding sources which are mainly short term before consideration of either equity or debt financing which are both external capital source. The classification of the external capital source is mainly done in form of equity financing through issue of stocks or debt financing through bonds, debentures, mortgages among others. The market in Asia has been experiencing growth and booming, and additionally greater market potentiality has been evident. Options of debt and equity financing in the Asian market is minimal as a result of their requirement. However foreign investors can use these financing options to diversify their risk. Three general categories of raising finances through debt financing in Asia are present (Kahal, 2001). To start with, the base country may make trade agreements and treaties with commercial banks including other financial institutions to raise capital for investment in the host domicile or country (Cheol et al, 2011). Nevertheless, these companies investment in the Asian market which is currently viewed as potential markets and opportunities and normally get considerable support from local commercial banks including other financial institutions and regional or international trade blocs that promote trade and investment in the region, for instance, Asia (Alan, 2009). Currently, a variety of trade agreements have been made especially between the Asian countries and other regions in the world inclusive of Northern America, Europe among others (Cheol et al,2011). It is therefore possible for foreigners to get benefit that arises from the contracts. For instance, the free trading zone of ASEAN has developed and will not be a constraint to a single country. This may result to the vast opportunities that are looked at by the investors as financing source due to free trading opportunities (Jeff 2002). Another important method of obtaining an efficient source of is through the hedging in the derivative market in the foreign exchange market (Michael 2007). The potential markets in Asia hugely fluctuate thus leading to higher volatility or risk in the overseas swap market. The key investors may hedge their risk exposure in association with the potential markets in Asia and therefore, can obtain benefit that may be an alternative source of capital for investors and the companies. (Backman, 2007). The trend and potential Asian markets such as India, Thailand, South Korea and China among others have major problem is usually the political condition and its corresponding environment and varying conditions to safeguard their general and public interest and thus posing a risk to investors (Alan, 2009). This is very in most cases very advantageous for various oversea companies. The threat is minimized, and the business is able to raise adequate finances that are used in operation of the business. Another crucial source of finance to this company is through option of government grants. This is understandable by governments in the operations in the market and a variety of the allowances and other funds in specialty that are allocated to businesses and investor (Cheol et al, 2011). These are popular financing options for capital sources in the markets in Asia. Leasing finance is among the popular source of capital in which the lender and the borrower enters into a contract called the lessee. It can be used for financing large problems (Alan, 2009). The company can either borrows an asset and used for a predetermined period of time up to maturity. The buyer may have opportunity of buying the property after the maturity (Cheol et al, 2011). The two major categories of leases are the operating and finance lease. The borrower agrees to pay regular principal installments plus the accumulated interest up to the lapsing of the lease period after maturity. It is a favorable capital source to many businesses. Any company that is considering investment in the potential markets in Asia has an option of seek the above discussion of a variety of opportunities and may thus make sound decisions as per the market requirement in which they are in operation (Michael 2007). Therefore it very crucial examination of the sources of capital and determine the best strategy so as to achieve the optimal goal of the business organization. This should be in line with the shareholders wealth maximization, cost minimization and profit maximization. Other strategies XP can expand to Asia and advantages. XP can be attracted in the foreign investment directly which is crucial for country development at national point (Saini, 2010). The various policies emphasize the required of the investors that improves production. XP plays a primary role in the economical and creational of developments regionally and capital inflow (Sasidhan, 2011). These theories and frameworks normally shows the elements which lead to contribution of decision-making (Dunning, Pak $ Bellona, 2007). Various advantages and incentives can be derived via FDI especially in developing economies. Firstly, the company can focus on the MNEs existences to a great extent (Dunning, 2007). Various benefits can be got from this, for example, the goodwill due locality of business and its ownership steering the FDI upwards. The XP can have internalization and make subsidiaries elsewhere for avoiding externalities. Interestingly, the benefit of ownership can be strengthened through a resource-based strategy that portrays the benefit of owning excellent resources (Rugman, 2011). The business locality and benefit of internalization are normally combinations with the view of institutional-based. This shows an importance of locality benefit (Dunning, 2008). Through the application of Dunning theory it is possible for XP to make analysis of their investment decisions usually have a positive effect on their economic status. Additionally, the flow of FDI to developed economies from developing ones may have a negating shortcoming that requires to be handled by experienced and strategic management (Cheol et al, 2011). Importantly, globalization has contributed to a greater market share of the flow FDI as direct investment from foreign countries (Cheol et al, 2011). Additionally, the growing corporate like XP promotes integration worldwide for the global market hence turning the world into global village. The multinational company extension increased the world trade and accelerated the economic growth and development. The businesses have begun in building domestic relationships for establishment and improvement of their image via FDI and gain enormous benefits. Majority of the nations are struggling to obtain a greater on FDI to promote the economic cooperation via increasing the freedom of FDIs. The importance of the MNCs is greatly encouraged via FDIs, but contrastingly the domestic share of the market is likely to decline. Largely, the MNCs have been criticized because they have contributed to domestic market disappearance (Michael 2007). Generally, the MNCS leads to cost minimization and improvement of economies of scale through optimal achievement of efficiency and reduction of duplication. For instance, XP is likely to invest in diverse localities and obtain benefit from countries they are investing in. The firms therefore expand, and they can obtain raw materials from host nations and at the same get cheap labor force from these countries (Cheol et al, 2011). Product diversification is promoted due to differing tastes of people in various localities. In addition to this, the joint venture investment decision has considerable effects on the decisions about investment. The market power the business expansion, and other associated market economies of scale and other economic benefits are primary concerns of MNCs about decision-making in the third world economies (Cheol et al, 2011). Additionally the political, social and economic aspects and good corporate governance are among the key factors that are in the linkage with existence of structured guidelines. For instance they have a great influence on economic development and investment promotion that faces reduced uncertainty with greater expectation in rate of return (Michael 2007). Good corporate governance to the company normally leads to a prosperous performance, promote FDI via increment in range of profitable investments. References Cheol Eun, Bruce Resnick (2011). International Financial Management . United Kingdom: Tata Mcgrawhill. All. Jeff Madura (2002). International Financial Management . 7th ed. United Kingdom: South-Western, Division of Thomson Learning Alan C. Shapiro (2009). Multinational Financial Management. 9th ed. International: John Wiley & Sons Sonia El Kahal (2001). Business in Asia-Pacific . Asia and Pacific Michael Backman (2007). Big in Asia: 30 Strategies for Business Success. Asia and Pacific Buckley A. (2000). Multinational Finance. 4th edn, Prentice Hall. Shaprio A. (2008). Multinational Financial Management.8th edn. Wiley & Sons. Read More