INTERNATIONAL FINANCE

1. *We WP and associates, a US MNE, join forces with Wasniowska, a Polish national, who is well versed in the Polish culture, as a minority shareholder, and invest $1 million in Poland in a furniture factory. The information we have is as follows. The European Union subsidizes the investment up to 60% of the cost and 40% of the interest. Thus, we borrow $3 million and receive $6 million free money from the EU. The prognosis of the project’s profitability is that revenue the first ten years will be $5million, the cost of goods sold will be $2.5 million, the SGA expenses will be $1 million and the tax rate will be 20%. Furthermore, the Polish T bond rate is 8%, the bond rate for WP/Wasniowska is 12%, the bheta of this firm is 2, and the ROR for the Polish stock market has been 14% annually. After the first ten year period, the NCF and the expenses will grow forever at a 2% growth rate. Moreover, the zloty, the polish currency, has had weakness against the US $ and the euro and all currencies during the 10 year analysis, and the forecast is that this experience will continue. Furthermore, the price elasticity of demand of furniture in the world (which is the market for this factory) is 6 (this matters in connection with the weak value of the zloty relatively to the other currencies.) The income elasticity of demand is extremely high, as well, hovering at about 5. The prognosis is that incomes will continue to increase in the markets of this factory. a. Compute the NCF, COC and NPV of WP/Wasniowska.(10 points) b. Explicate this FDI from a behavioral viewpoint.(8 points) c. Analyze the economic reasons for this FDI.( 7 points) a) Desc Info Cost of Furniture Factory 10,000,000 Government Subsidy 60% 6,000,000 Investment 1,000,000 Debt 3,000,000 Total Cost 10,000,000 Government Subsidy 60% 6,000,000 Net Cost 4,000,000 Interest rate 12% Total Interest 360,000 Government Subsidy 40% of interest 40.00% Government Subsidy 40% of interest 144,000 Company Interest Expense 216,000 20 straight line depreciation per year 500,000 Total Revenue Total Revenue first 10 years 5,000,000 Operational expense 3,500,000 Tax rate 20% Polish T Bond 8% Risk Premium 6% Market Rate 14% Bheta 2 COE=Rf + (Rm -Rf)B 20% To calculate WACC, multiply the cost of each capital component by its proportional weight and take the sum of the results. The method for calculating WACC can be expressed in the following formula: Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D = total market value of the firm’s financing (equity and debt) E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate Rate Greek T Bond 8% Risk Premium 6% Market Rate 14% Bheta 2 COE=Rf + (Rm -Rf)B 20% Interest Rate 12% Tax rate 20.00% Government Subsidy of interest 40.00% Debt 3,000,000 Equity 1,000,000 Total Cost 4,000,000 E/V 25.00% RE = COE 20.00% E/V * COE 5.00% D/V 75.00% RD = COD – not Correct 7.20% D/V * COD 5.40% (1-tc) 80.00% D/V *RD*(1-t) 4.30% WACC 9.32% 1 Year Income Statement 10 Year Income Furniture Factory 5,000,000 50,000,000 Other - Revenue 5,000,000 50,000,000 - COGS 2,500,000 25,000,000 SGA 1,000,000 10,000,000 Expenses 3,500,000 35,000,000 EBIT 1,500,000 15,000,000 Tax 300,000 3,000,000 Net Income 1,200,000 12,000,000 Interest @ .60% 216,000 2,160,000 EAT 984,000 9,840,000 Operating Cash Flow NCF= 1) EBIT operating profit 1,500,000 + 2) Depreciation 500,000 - 3) Taxes (300,000) NCF 1,700,000 10 Year NPV = -$4,000,000 + ($1,700,000 *((1-(1/ (1+.0932)10 ))/.0932)) 10 Year NPV = $6,758,015 NPV 10+ = (NCF* (1 + G) / (WACC-G))/ (1 + WACC) 10 – present value of now NPV 10+ =($1,700,000*(1+0.02)/(0.0932-0.02))/((1+0.0932)^10) NPV 10+ = $9,717,214 NPV = $6,758,015 + $9.717.214 NPV = $16,475,229