Reference no: EM132215865

Assignment -

BACKGROUND - One of the best ways to learn the broad concepts presented in this course is to put yourself in the position of an MNC manager or board member and apply the concepts to financial decisions. Although board members normally do not make the decisions discussed here, they must have the conceptual skills to monitor the policies that are implemented by the MNC's managers. Thus, they must frequently consider what they would do if they were making the managerial decisions or setting corporate policies.

This exercise is based on a business that you could easily create: a business that teaches individuals in a non-Australian country to speak English. Although this business is very basic, it still requires the same types of decisions faced by large MNCs.

Assume that you live in Australia and invest A$60,000 to establish a language school called Bell Beijing in Beijing, China. You set up a small subsidiary in China with an office and an attached classroom that you lease. You hire local individuals who can speak English and teach it to others. Your school offers two types of courses: a one-month structured course in English and a one-week intensive course for individuals who already know English but want to improve their skills before visiting Australia. You advertise both types of teaching services in local newspapers.

All revenue and expenses associated with your business are denominated in Chinese yuan. Your subsidiary sends most of the profits from the business in China to you at the end of each month. Although your expenses are fairly stable, your revenue varies with the number of clients who sign up for the courses in China.

Questions:

1. Compare and discuss the advantage and disadvantage of the exchange rate systems in place in Australia and China. How does the exchange rate system in China impact your business?

2. Explain how you would bring back profits from your business back to Australia and briefly discuss the tax implication (both China and Australia) on your profit, if any.

3. Assuming that there is a repeat of the Asia Financial Crisis that took place in the late 1990s and currency across Asia is fast depreciating.

A) Explain what is likely to happen to the Chinese Yuan in light of the exchange rate system in place in China. How would the People's Bank of China (PBC - Central Bank of China) likely react to the crisis and how does this impact your business? Focus your answer solely on the impact of the PBC action on the exchange rate of the Yuan.

B) Given that China is a large importer of commodity products from Australia, how would the Reserve Bank of Australia (RBA) likely to react if the Yuan depreciates significantly? How would this likely to affect the profit from your business in China?

Your business is now growing fast and you are interested to open more tuition centers around other parts of Beijing and even in other Chinese Cities.

4. If you pursue this idea, explain how financial markets could help you finance the growth of your business. Explain which of the financial instruments / market are most accessible to you and what are the most likely options you can consider.

5. Which currency are you likely to raise funding in? Explain what are the advantages and disadvantages of your choice.

6. Assuming that you have decided on raising AUD to fund the growth of your business in China through a local (Australian bank) loan. The bank has expressed concerns that you may have trouble in the future in servicing the loan payments should the Yuan depreciates against the AUD. What contracts or instruments can you enter into with the banks to help mitigate this concern? Explain how such instrument works in the financial market.

7. What are other ways you can grow your business should you encounter problems in raising the necessary capital to fund your expansion? Explain your options and compare and contrast the merits of each options.

INTERNATIONAL INVESTING PROJECT -

This project allows you to learn more about international investing and about companies that compete in the global arena. You need to create a stock portfolio of at least 2 Australian multinational corporations and 2 foreign stocks. You will monitor the performance of your portfolio over the school term and ultimately will attempt to explain your portfolio performance. The explanations will offer insight into what is driving the valuations of the Australia-based MNCs and the foreign stocks over time.

Select two stocks of Australia-based MNCs that you want to include in your portfolio. If you want to review a list of possible stocks or do not know the ticker symbol of the stocks you want to invest in, go to the Yahoo Finance Australia. Make sure that your companies conduct a substantial amount of international business.

Next, select two foreign stocks that are traded on the Australian Securities Exchange (ASX) and are not from the same foreign country. Many foreign stocks are traded on the ASX; to get the Foreign Exempt and Foreign Domicile companies listed on the ASX. You should select the ASX code of the foreign company; for example, AIZ is the ASX code for Air New Zealand.

You can use this ASX code to review the company's background information, including a description of its business and its stock price trend over the last year. It is assumed that you will invest A$10,000 in each stock that you purchase. Your purchase price should be the closing price of the stocks you have chosen as at 16th November 2018.

List your portfolio in the following format:

You can easily monitor your portfolio using various Internet tools. If you do not already use a specific website for this purpose, go to Yahoo Finance Australia website. Follow the instructions, and in a few minutes, you can create your own portfolio tracking system. This system not only updates the values of your stocks but also provides charts, recent news, and other information on the stocks in your portfolio.

EVALUATION -

At the end of each week during the trimester, you should evaluate the performance and behavior of your stocks. You are required to record the prices of the stock as at closing on Friday each week up to week 8 of the class.

1) a. Determine the percentage increase or decrease in each of your stocks over the period of your investment and report that percentage in a table like the one below for each week. In addition, offer the primary reason for this change in the stock price based on news about that stock or your own intuition. To review the recent news about each of your stocks, click on Yahoo Finance Australia website and insert the ticker symbol for each company. Recent news is provided at the bottom of the screen.

b. Comment on your portfolio performance. If it is good, was it because of the markets where your companies do their business or because of company-specific conditions? Please explain.

2) Determine whether the performance of each of your Australia-based MNCs is driven by the Australian market. Go to the site Yahoo Finance Australia and insert the symbol for your stock. Once the quote is provided, click on Interactive Chart. Then, click on Compare and type ^AXJO (ASX 200) to assess the relationship between the Australian market index movements and the stock's price movements. Explain whether the stock's price movements appear to be driven by Australian market conditions. Repeat this task for each Australia based MNC in which you invested.

3) a. Determine whether the performance of each of your foreign stocks is driven by the corresponding market where the company is based. First, go to the site Yahoo Finance Australia and look up the symbol for the country index of concern.

b. Determine whether your foreign stock prices are highly correlated. Repeat the process just described, except insert the symbol representing one of the foreign stocks you own in the box below the chart.

c. Determine whether your foreign stock's performance is driven by the Australian market (using the S&P/ASX 200 as a market proxy). Erase the symbol you typed into the box below the chart, and click on S&P just to the right.

4) a. Review annual reports and news about each of your Australia-based MNCs to determine where they do most of their business and the foreign currency to which they are most exposed. Determine whether your Australia-based MNC's stock performance is influenced by the exchange rate movements of the foreign currency (against the Australian dollar) to which it is most exposed.

You can convert the foreign currency to which the MNC is most exposed into Australian dollars and determine the exchange rate movements over the period in which you invested in the stock. Provide your assessment of the relationship between the currency's exchange rate movements and the performance of the stock over the investment period. Attempt to explain the relationship that you just found.

b. Repeat the steps in (4a) for each Australia-based MNC in which you invested.

5) a. Determine whether the stock performance of each of your foreign companies is influenced by the exchange rate movements of the company's local currency against the Australian dollar. You can convert the foreign currency of concern to Australian dollars and determine the exchange rate movements over the period in which you invested in the stock. Provide your assessment of the relationship between the currency's exchange rate movements and the performance of the stock over the investment period. Attempt to explain the relationship that you just found.

b. Repeat the steps in (5a) for each of the foreign stocks in which you invested.