Reference no: EM132207483

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.