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Question no. 3 .
Solution :
Solution : Cross Listing means to do the listing of a company’s ordinary shares on a different exchange other than its original stock exchange. So under Cross Listing a Company can list its share on multiple stock exchange.
Benefits of Cross Listing of Ordinary Shares.
We have discussed about the benefits of cross listing. Now with the reference of the above point we can explain the benefits of Trendsetter plc UK after listing in the Indian Stock Exchange as greenfield investments.
Benefit of Trendsetter plc UK cross listing of the share.
B ) A large number of exports are made to the US. Explain the potential benefits of Trendsetter plc UK borrowing in the USA.
Answer: As we know that the Trendsetter plc UK is exposed to operation exposure due to large number of consumer base in the USA. They would be having a lot of Accounts Receivables form the USA. For hedging of the FOREX Risk in the USA they have to use lot of Hedging techniques in the USA.
Some of the hedging techniques are as follows .
Now if we understand the situation of hedging through money market the hedging approach is very simple . Suppose there are accounts receivables with 6 months credit period. What the company will do that it will borrow from the US market the present value of amount discounted with the borrowing rates of the US for 6 months time . on the spot date company will receive the payment from accounts receivables and it will pay back the borrowing amount with interest. So an operational exposure risk is hedge with money market operations.
Secondly as the large number of exports are there in the USA. With this kind of financial credentials and having a lot of liquidity in the US market Trendsetter plc can plan for long term borrowing from the US market. This will help them to fund for investment in the future and reduce its cost of capital and hedging also could be done with the payment of interest as well as for repayment. Company will have very low risk level at the time of repayment of principal as well as interest as they are having a lot of accounts receivables in the USA.
Answer : Segmented Market : Segmented Market concept is used for marketing of the product as well as services. But here we are going to study from the angle of cross listing. So companies world wide divide the market according to different segments. The purpose of segmentation is very simple, Companies give weighted to different market on the basis of Investor base, Amount of capital available for investment , reporting norms , disclosure norms, corporate governance, as well as the cost of the available funds. For an example the cost of capital in India comes to approximately 12 %, in the US it is approximately 4%, in Europe it is approximately 6%, in Japan it is 2%. Corporate also see the marketability of different stock exchange like NASDAQ, New York stock exchange, London stock exchange, Luxemburg stock exchange, these exchange has better marketability as well as a lot of capital. So company divide the investor market on the basis of different segment and it reduces the overall cost of capital and increase the liquidity also .
Illiquid Market : Illiquid Market means where it is very difficult to sell the company security. As we have taken some name of world famous stock market, we can also have example of some Stock exchange of Africa, or you see in India we are having Bombay stock exchange and national stock exchange are highly liquid market but there were a stock exchange called Magadha stock exchange and the liquidity position was so bad that it was decided to close down and it is become non operational today. Like wise we are having hundred of stock exchange which is highly illiquid. Even you list your share there are very few potential buyers, cost of capital is very high and the amount of capital availability is very less. This type of market is called illiquid market. With having all negativity the biggest problem is that their cost of capital is very high and if you operate in those type of stock exchange you will get less capital and it will adversely increase the cost of capital of the company .
Q no. 4. Solution:
a). Calculation of the net present value of the investment for Trendsetter plc.
Cost of Capital is 15%.
We have to calculate the net present value of the joint venture investment in Amulta Limited .
Particulars Year/ Cash flows |
Amount in Rupees( Million) |
Foreign exchange rate forecasted (Rupees / ) |
Amount in ( Million) |
Discounting Factor at cost of capital 15 % |
Present Value ( ) Million |
Year 0 |
(400) |
86 |
(4.6512) |
1 |
(4.6512) |
Year 1 |
200 – 30 = 170 |
85 |
+ 2 |
.8696 |
1.7392 |
Year 2 |
300 - 30= 270 |
85 |
+3.1765 |
.7562 |
2.4021 |
Year 3 |
100 - 50 = 50 |
84 |
+ 0.5952 |
.6576 |
0.3914 |
NPV |
(.1185) |
With the above calculation we are able to see that there is a negative NPV . Hence appraisal on the basis of NPV for this joint venture would be difficult. We may select this investment proposal on the basis of other criteria.
As far as additional Cash inflow in information may be irrelevant for this investment proposal . as these cash inflows are seems to be the inflows of Trendsetter plc UK from UK operation.
B.) Solution :
An alternative to the joint venture for three years Trendsetter plc UK wan to setup a subsidiary in India. So there will be FDI in India .
Points to be considered from the perspective of Trendsetter plc UK.
Points to be considered from the perspective of Amulta Limited as subsidiary.
Additional perspective from the Trendsetter plc Uk.
C.) Answer :
As India is a developing nation and now they have opened their economy to the world and relaxed the terms and condition of FDI in India. But still there are a lot of other risk involve with the FDI in India which is know as political risk, a change in the new govt. may spoil all the plan than we are having economic risk. Hence it is better to wait and watch for some time and instead of investing as FDI go and do the joint venture for three years . In the three years times Parent company will be able to analyzed the all type of investment risk associated in India. In this period they can also analyze that is there are better opportunity available in the rest of the world in comparison with India . hence it would be suggested that even the NPV is negative for the cash flows for the joint venture, we have earlier also discussed that on the basis of NPV techniques we will decline the joint venture projects but we will do some real option analysis and on the basis of weighted given for all the other consideration it is better to select the project and invest in the joint venture . even we are getting small negative NPV we will get three years time to analyze the subsidiary investment proposal and than we may invest in the future with better and strong plan.
References : International Financial Management by Eun/ Resnick – Tata mcgraw HILL
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