INTERNATIONAL

FINANCE FOR INTERNATIONAL BUSINESS

Introduction

The finance for international business is referred to as the operations of the business, which involves the management of economic practices and policies within the firm. Due to the rapid increase of globalization, the businesses are much influenced to enhance their reach at the global platform so that they can gain a competitiveadvantage over the rival firms.

In the context of the given scenario, Fenland Foods Plc. was a family business, which was acquired by the Williams Family in the year 1970 in Lincolnshire.However, in the year 1980, it was restructured as the public limited company.

In the year 2020, April present decision-makers of the business look forward to diversify and expand the operations of the company so that they can enhance their productivity and profitability on the international platform. The study will focus on evaluating the investment project of Fresh Farm Foods Company on behalf of Fenland Foods Plc.

The study will also identify the maximum value of the project in order to justify its suitability. In addition, the potential impact of foreign exchange that Fenland Foods Plc. can face while acquiring the company will bediscussed along with the purchase financing options.

Discussion

Evaluate the Fresh Farm Foods Co. investment project on behalf of Fenland Foods plc. Advice the firm on whether it should undertake the project and identify the maximum price Fenland should pay to acquire the Fresh Farm Foods Co.

In the context of the given case scenario, it is observed that in order to evaluate the feasibility of the investment project of Fresh Farm Foods, it is much required to undertake the evaluation as per the hurdle rate of Fenland Foods Plc. the computation of hurdle rate that is used by the Fenland Foods company is drafted below:

Calculation of the Hurdle rate used by Fenland Foods Company
DetailAmount
The cost of the debt (As per the interest payment rate)7%
The cost of the preference share (As per the dividend payment rate)5%
The Risk-Free Rate (As per the Rate of return of 5 year U.K. government Bond)0.25%
The Market Return (As per the FTSE all-share index return)5.30%
The Beta (As per the fenland foods company)1.7
The Tax rate (As per the U.K. Corporation tax rate ) 21%
The cost of equity share (the risk-free Rate + (Beta*(the Market Return – Risk-Free Rate of the company))8.84%
The Weight of debt in the capital structure of Fenland Foods Company 0.15
The Weight of preference in the capital structure of Fenland Foods Company 0.06
The Weight of equity in the capital structure of Fenland Foods Company 0.79
The Weighted Average cost of capital 8.10%

Table 1: Hurdle Rate of Fenland Foods Company

(Source: Created by the researcher)

The calculation of depreciation will be required for the total fixed tangible assets in order to determine the Rate of depreciation. The depreciation amounts that will be charged annually on the investment project are drafted below:

Calculation of depreciation of total fixed tangible assets
ParticularsAmount (€)
The Freehold Shops                600,000
The Fixtures and fittings                160,000
The Delivery Vehicles                    70,000
The office equipment                   20,000
The Total fixed tangible assets                 850,000
The average age of fixed tangible assets                              3
Therefore, the amount which is presented above of the asset is 70 percent of the cost amount as the depreciation rate is considered to be 10 percent                             .70
The purchase cost of the fixed tangible assets is:             1,214,286
The Rate of Depreciation is:10%
The Depreciation is:          121,428.57

Table 2: Depreciation amount that will be charged annually on the investment project

(Source: Created by the researcher)

Furthermore, the profit of the Fresh Farm foods Company will be forecasted by considering the above-stated tables of Rate of hurdle and the amount of deprecation. The forecasted profitability of the Fresh Farm Foods Company aredraftedbelow:

Forecasting of Profit of Fresh Farm Foods Company  ( in the most likely scenario)
Year20212022202320242025
Particulars(€’000)(€’000)(€’000)(€’000)(€’000)
The Total Sales Revenue 870.00974.401091.331222.291368.96
The cost of Labor 198.00213.84230.95249.42269.38
The Other Variables Cost 297.00311.85327.44343.81361.01
The Total Variable Cost495.00525.69558.39593.24630.38
The Margin of Contribution 375.00448.71532.94629.05738.58
The Total Fixed Cost 130.00136.50143.33150.49158.02
Profit Before the Depreciation and Tax 245.00312.21389.61478.56580.56
Depreciation amount121.43121.43121.43121.43121.43
The profit before tax123.57190.78268.18357.13459.14
The expense of Tax ( Ireland corporate tax rate will be used)14.8322.8932.1842.8655.10
The Net Profit 108.74167.89236.00314.27404.04

Table 3: Forecasted Profit of Fresh Farm Foods Company

(Source: Created by the researcher)

Considering the above calculation, the assumed amount which will be required by the Fenland Foods is drafted below:

The most likely amount of the investment
ParticularsAmount (€)
The equity Share value of Fresh Farm Foods Company                 550,000
The premium that expected by shareholders of Fresh Farm Foods Company (100% on equity value)               550,000
Profit and loss account                305,600
Total investment amount            1,405,600

Table 4: The most likely amount of the investment

(Source: Created by the researcher)

It stands detected that the total amount of investment, which will support the Fenland Foods, is derived to 1, 405,600 Euros.

 

Forecasting of Net cash flow from Fresh Farm Foods Company  ( in the most likely scenario)
Year202020212022202320242025
Particulars(€’000)(€’000)(€’000)(€’000)(€’000)(€’000)
 012345
Initial Investment Amount 1,405.60
Total Cash outflow
Net Profit 108.74286167.8877236.0026314.2743404.0390543
Add: Depreciation 121.43121.43121.43121.43121.43
Total Cash inflow 230.17289.32357.43435.70525.47
Net cash flow              (1,405.60)        230.17     289.32     357.43     435.70                525.47
Hurdle rate which will be used 8.10%
Cumulative net cash flow             (1,405.60)  (1,175.43)   (886.11)   (528.68)     (92.98)                432.49
Discounted net cash flow -1405.6212.92403247.5821282.9516319.0682355.9690821
Discounted cumulative cash flow -1405.6-1192.676-945.094-662.142-343.07412.89506153
Payback period 4.18
Discounted payback period 4.97
Net Present Value ( €millions)12.9
Internal Rate of return 8.40%

Table 5: Forecasting of Net cash flow from Fresh Farm Foods Company (in the most likely scenario)

(Source: Created by the researcher)

Considering the above net present value for the deal project, it stands observed that the acquisition of Fresh farm Foods of the company is approximately 12.9 thousand euros. Hence, as the overall NPV of the project remains positive, it can be commented that the project is much feasible for the Fenland foods to undertake.

The company must focus on the acquisition deal as it will benefit the corporation in various terms of enhancing profitability and productivity.

The NPV is one of the most effective approaches, which facilitate the investor to consider the time value of money associated with the deal. In order to undertake the investment appraisal methodology, it was detected that the policy of Fenland foods states that they will consider those project which holds the payback point of maximum of the five years.

At the same time, analyzing the period of payback of the deal, it was computed to be 4.18 years. The percentage represents the viability of the project in thecontext of the given scenario of Fenland foods.

In addition, when the period of discounted payback was computed, it also presented a profound figure as per the policy of the corporation. The computed period of discounted payback was 4.97, which is also under the five years of payback point, which was earlier stated by the corporation.

Undertaking the IRR rate of the deal, it was analyzed that the project holds 8.40 percent of the Rate, which is observed to be higher than the hurdle rate. This signifies the suitability of the projectas the hurdle rate was detected to be 8.10 percent and the IRR was calculated to be 8.40 percent.

If the Fenland Foods considers this project, it will ultimatelyfacilitatethem to gain a competitiveadvantage over the rival firms.Hence, it could be considered that the Fresh Farm Food is a much profitable inclusion within the investment appraisal method. It is also advised that the corporation should undertake the investment project to enhance this market expansion and diversify their products and services to provide a better profitability to the company.

Furthermore, the computations of the price that the Fenland Foods Plc. should look forward to pay are undertaken by considering the above stated analysis and represented table. The maximum value Fenland Foods can pay for the acquisition are drafted below:

The maximum amount that can be paid for Fresh Farm Foods Company
Year20212022202320242025
ParticularsAmount (€)Amount (€)Amount (€)Amount (€)Amount (€)
Discounted cash flow  €212,924.03 €247,582.14 €282,951.61 €319,068.20 €355,969.08
The maximum amount that can be paid for Fresh Farm Foods Company €1,418,495.06

Table 6: Maximum Amount that can be paid for Fresh Farm Foods Company

(Source: Created by the researcher)

It stands detected in the above table that the maximum amount that Fenland Foods should look forward to pay is 1,418,495.06 Euros. The amount is computed by projecting the discounted cash flow of the Fresh farm Foods. It was observed that the company is in the position to generate this much amount of the flows of cash after it is being discounted by the hurdle rate of 8.10 percent.

The discounted cash flow is being used as within the computation of the maximum payment for the deal as the company has to pay the amount currently. Hence, I can be commented that to estimate the present value of the cash flow, discounted cash flowshould be taken into consideration.

In addition, within the calculation, five years is been considered as the company policy states the maximum period of payback of five years. It can be stated that the amount which will be invested will be effectively recovered by the Fenland Food Plc. in five years.

Moreover, the acquisition investment will benefit the company by yielding effective return on the deal after the five years,which will ultimately add to the profitability of the firm.

Advise the firm on the potential impact of foreign exchange on the project

The potential negative impact the Fenland Foods Plc. can face while commencing the acquisition program along with the suggestionto overcome it is drafted below:

Transaction Risk: Transaction risk is referred to those challenges which are faced by the corporation while considering trade transactions or undertaking the lending or borrowing of the foreign currencies (Arizeet al., 2018). It is often being observed that the exposure of transactions occurs within a corporation due to the changes in exchange rate.

It ultimately results home currency while computing the inflows as well as the outflows of the currencies or money. In the context of Fenland Foods, the company will suffer from high fluctuations of currencies as the receivable and payable will be recorded in Pound sterling. However, in order to prevent the company with the transaction risk, the company should focus on using the forward contracts.

It is referred to as the agreement between two parties who are intending towards making a deal to sell or buy the specific asset, on certain specified data as wellas the price. It will be much useful contract for the company for hedging or for the speculations and will protect the company with the transaction risk.

Translation Risk: Translation risk is referred to as the challenges that are faced by the corporations due to the denomination of the foreign currency which ultimately reduces the value of assets and the liabilities of the firm (Matsushima et al., 2016).  While consolidating the accounts, the Rate of exchange is used in order to transform the accounts of the foreign subsidiary.

However, the denomination of the foreign currency often reduces the relevancy of the accounting and financial statements of the subsidiary company. As the material of the circumstance, the business investors intends to know the consolidate position of the subsidiary company at their domestic currencies.

Several companies are there who look forward to simply avoid the risk as they think that it is a simple procedure of accounting. However, the Fenland Foods Plc. can reduce the translation risk by reducing the working capital if the foreign current is intending to depreciate.

In addition, the company can also focus on assessing the translation impact on the deal. It will facilitate the corporation to protect their revenues that are beingincurred in Pound sterling.

Economic Risk:Economic risk is known as the impact of the changes in the exchange rate on the cash flow of the business (Ito et al., 2016). The economic risks are determined by the company as the feasibility of present value of the enterprise is caused by the uncertain exchange rate fluctuations.

The appreciation or the depreciation in the currency rate changes the relative price of the products andservices sold in various economies. In order to mitigate the economic risk the Fenland foods should focus on assessing the stability of the exchange rates between the Pound sterling and euros so that they can diminish the risk and can enter in the market without much hindrance.

Evaluate the alternatives for financing the purchase

As per the current structure of capital of Fenland foods it is being observed that the company is dealing with the equity shares, debentures and the preference shares. Acknowledging the existing financial sources it was detected in order to determine the best financing sources, which will facilitate Fenland Foods to address the monetary needs of the investment.

Preference share: The preference share had led the company to sell its shares to the investors. However, one of the major benefits is that the share does not give any kind of ownership or control to the preference shareholders. However, the Rate of divided is much higher in this situation (Na and Subramaniam, 2018).

Equity share: The Company is already dealing with the issue of equity share. In this source of finance, fenland foods had intended to sell some amount of the company’s share to the investors. Oneof the major advantages of the approach the corporation is enjoying that the company is not bound to pay the money received from the investors. However, it reduces the control and power of the owners over the entity (Edmans and Mann, 2019).

Debentures: Fenland Foods plc. also deals with the debenture. One of the major advantages of the approach is that it retains the ownership and control of the owners over the corporation. However, they hold the obligation to repay the money received along with the interest payment (Sobiegraj, 2017).

Considering the overall three approaches, it can be said that the Fenland Foods Plc. should look forward to issue new debenture. It will help the company to finance its purchase, along with maintaining full control over the company’s ownership.

Conclusion

It is concluded from the research that the Fenland Foods should focus on accepting the investment project of Fresh Farm Foods Company as it will help the firm to gain higher profitability andproductivity. In addition, the decision-makers of the corporation should make a proper decision so that they can mitigate future risk while commencing the acquisition process.

References and Bibliography

Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. Advances in Mergers and Acquisitions, p.67.

Arize, A.C., Andreopoulos, G.C., Kallianiotis, I.N. and Malindretos, J., 2018. MNC transactions foreign exchange exposure: An application. International Journal of Economics & Business Administration (IJEBA), 6(1), pp.54-60.

Edmans, A. and Mann, W., 2019.Financing through asset sales.Management Science, 65(7), pp.3043-3060.

Ito, T., Koibuchi, S., Sato, K. and Shimizu, J., 2016. Exchange rate exposure and risk management: The case of Japanese exporting firms. Journal of the Japanese and International Economies, 41, pp.17-29.

Leśniak, A. and Zima, K., 2018. Cost calculation of construction projects including sustainability factors using the Case Based Reasoning (CBR) method. Sustainability, 10(5), p.1608.

Matsushima, T., Ohkawa, L. and Inoue, H., 2016.The Global Code of Conduct in the Foreign Exchange Market (No. 16-E-6).Bank of Japan. Pp.1-7

Na, H. and Subramaniam, V., 2018.Proprietary Information and the Choice of Debt Financing Source. Pp.2-54

O’callahan, D.M., Chicago Board Options Exchange Inc, 2018. Method of creating and trading derivative investment products based on an average price of an underlying asset during a calculation period. U.S. Patent Application 15/659,181.

Sobiegraj, A., 2017. External funding sources of business activity.World Scientific News, 78, pp.240-248.

Weetman, P., 2019. Financial and management accounting. Pearson UK.

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