Finance and Accounting

Project description
ASSESSMENT PROFORMA 2A 
 
FRONTSHEET FOR IN-COURSE ASSESSMENTS 
Semester 2, 2013/14 
COURSEWORK 
 
MODULE TITLE: International Business Finance 
 
TITLE OF ASSESSMENT: Coursework 
 
COURSE(S): ACCOU, BAAPF, BAHIB, and EXMIE 
 
 
SUBMISSION LOCATION: FBL Reception, Rose Bowl Level 1 and electronic copy submitted on Turnitin on X-stream 
 
 
ASSESSOR(S): Moade Shubita and John Foster 
 
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Notes for Students: 
 
• Answer all parts of this coursework 
• Your answer in total should not exceed 3,000 words 
• All work must be word processed 
• All work must be 1 ½ line spacing and printed on A4 papers. 
• No double sided printing. 
• The number of words must be written on top of the first page of your coursework. 
• One hard copy to be submitted, as indicated above, and an electronic copy submitted on Turnitin. 
 
 
 
 
 
Marks will be awarded taking the following into consideration: 
 
 
Coverage of theoretical underpinnings involved* 
 
Demonstration of a critical understanding of the theoretical aspects involved* 
 
Practical application of the theoretical aspects to the case study* 
 
Evidence of additional, relevant, research: Additional evidences should be included in the report from various sources including academic journals 
 
Coherence and quality of report. Please consider report writing session that done in week 5 as guidelines 
 
 
 
 
 
 
*The theoretical areas covered should include: 
 
 
• Multinational capital budgeting 
• Explanation of the ‘multinational financial system’ 
• Use of the international financial markets 
• Consider repatriation of profits 
• International tax planning 
• Management of risk – hedging 
• Forecasting future exchange rates 
• Calculation of after tax home cash flows 
• Multinational working capital management 
• International cash management 
• Assessment of political risk 
 
 
IFM Plc is a multinational company based in France and was founded in 1947 after the Second World War. The multinational corporation has a market capitalisation of 2.5 billion euros and has a gearing level of approximately 88%. IFM Plc currently turns over 60 million euros per annum in worldwide sales and profits have stabilised over the last 5 years, averaging a trading profit of approximately 1.8 million euros per annum. 
 
The company specialises in financial services to private equity companies operating in the industrial and commercial property construction and development industry. Although IFM’s head office I s currently based in France, they have subsidiaries in Germany, UK, Austria, Monaco and Poland. The parent company is home to the treasury management team and Board of Directors of the company. The corporation currently operates a centralised treasury management system, operating from France. 
 
The subsidiaries have operations within their home country, offering financial services locally and throughout the Eurozone region. The company is currently undertaking 5 year strategic review for the period 2013 – 2018 and is looking closely at its operations to identify how it can achieve its expansion and growth objective which is a 5% increase over the next 5 years. The company is considering expansion in Asia – namely China and India as there is much growth in these regions over the last few years. It has been estimated that 250 million euros will be needed to fund the proposed expansion over the next 5 years. 
 
However, the financial services industry has experienced a range of global macro-environmental forces impacting on the industry, particularly in Eurozone which has led to both increased competition and increased regulation. IMF Plc have been winding down their German subsidiary (which has been making a trading loss for the last 5 years) with a view to divesting their investment operations which are run here and specialising in other services which they offer. 
 
They have been approached by a new entrant into the market, EMF Plc who has offered 2 million euros in a 50:50 joint venture deal over 4 years. Hence the total cost of the joint venture will be 4 million euros. EMF Plc is an investment fund management company based in Germany. 
 
The company is also considering restructuring so that the parent company in France is re-domiciled to Monaco, as a large proportion of their Eurozone sales are generated there. 
 
 
 
 
 
 
 
 
 
IFM Plc 2013 (German Subsidiary) – Book values 
 
 
Fixed asset 
Investment (some of which is leased from Parent company) Euros 
 
17.0m 
Working capital 3.0m 
Total 20.0 m 
 
IFM Plc 2013 (German Subsidiary) 
 
 
Equity Euros 
 
13m 
Debt 7.0m 
Total 20 m 
 
Note 1 
The shareholders of IFM plc can invest their money in an alternative investment that yields a return of 12%. Interest of 7% was paid on debt. 
 
Note 2 
Cost of capital projected is based on the current weighted average cost of capital (WACC). It is this rate which should be used to evaluate the joint venture (to the nearest %) 
 
The company is currently faced with TWO strategic issues; 
 
Strategic option 1 
 
Whether to enter into the Joint Venture with EMF Plc. (There is insufficient information to make a comparison between divestment and JV, so just evaluate the JV). 
 
FDI (Joint Venture) Information 
 
The Finance Directors of both companies have come together and listed the following assumptions. IFM Finance Director, Mrs Diana Worth has asked you as the capital projects accountant to put together a report evaluating the proposed joint venture based on the following information which relates to IFM Plc only. 
 
I. The Joint venture agreement is initially set for 4 years, with the option of a company buy-out in year 4 or continuation of joint venture beyond year 4 
II. IFM Plc will pay 60% of investment in year 0 and the remaining 40% of investment in year 1 relating to their share of the investment. 
III. Projected annual gross cash flows from the joint venture are expected to be 0.900 million Euros and £0.450 million in year 1 and are expected to increase by 15% per annum. 
IV. All sales will be generated from Eurozone and UK market 
V. The spot rate is £0.8410/€ 
VI. Operational costs of the subsidiary are expected to be 0.235 million euros per annum which includes 0.0258 million euros for depreciation 
VII. The annual rate of inflation in Germany is expected to be 2.5% (this should be applied to operational costs only) 
VIII. The interest rate for UK is expected to be 2% an

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