Foreign Subsidiary Investment Plan Case: Multinational Capital Budgeting China & Australia

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Foreign Subsidiary Investment Plan

Case: Multinational Capital Budgeting

China & Australia

Hypothetical Incorporated

MBA AF 626 Fall 2011
International Financial Management
Professor XX

XX
XX
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XX

Table of Contents

PART I – Analysis: Australia vs. China
A. Country Analysis
1. Economic Environment3
2. Social Environment10
3. Political Environment12
B. Industry Analysis
1. Aluminum Industry in Australia17
2. Airline Industry in China18

PART II-Capital Budget Analysis
1. Weighted Average Cost of Capital 19
2. Net Present Value 20
3. Scenario Analysis 21

PART III – Conclusion: Investment Decision23

References 24
Appendixes26

PART I – Analysis: Australia vs. China
A. Country Analysis
I. Economic Environment
Australia
Australia is a market oriented financial system which includes the world’s 13th largest economy and the 9th highest per capita Gross Domestic Product (GDP), with almost two consecutive decades of growth and the unemployment rate falling to a generational low. As a result of nearly three decades of structural and policy reforms, Australian’s economy has proven to be a competitive player in the increasingly integrated global markets. In terms of country risk, Australia’s favorable attitude towards private enterprise and its well-protected property rights incent growth and propagate stability conveying comfort to international investors that its government will not take actions that adversely affect the value of companies operating there such as expropriation. Australia's economy is dominated by its services sector; yet, it is the agricultural and mining sectors that account for the bulk of Australia's exports. Australia's comparative advantage in the export of primary products is a reflection of the natural wealth of the Australian continent and its small domestic market; 23 million people occupy a continent the size of the contiguous United States. Even though the relative size of the manufacturing sector has been declining for several decades, the industry has stabilized at around 8.5% of GDP. Furthermore, the global recovery is putting upward pressure on prices for Australia's commodity exports, causing a substantial surplus in the current account balance due to the increase in trade. Since the 1980s, Australia has undertaken significant structural reforms transforming itself from a highly isolated, protected and regulated market-place to an open, internationally competitive and export-oriented economy. Australia is one of the few developed countries that weathered the Great Recession unscathed and like Canada its vast resource base gives the country emerging-market-like characteristics. Stable institutions and Western-style transparency make the “Land Down Under” an attractive destination for investors seeking relatively high returns with a lower variance for risk. In addition, the Australian dollar is rooted in the coal, iron ore, natural gas and other minerals and resources found there in abundance. Fiscal irresponsibility expressed through excessive government spending is one sign of elevated country risk due to the increased probability of a government default. However, a current-account deficit or surplus is not necessarily a sign of economic weakness and vigor respectively. One country risk indicator is the government deficit as a percentage of GDP. The higher this figure, the more the government is promising to its citizens relative to the resources it is extracting in payment.

Chart 1 Australia Government Budget as a percentage of GDP (TradingEconomics, 2011) Chart 1 shows, there has been a structural deterioration in the Commonwealth’s underlying balance since 1998, when they were generally running surpluses. As a result of sustained budget surpluses, Australia was in a...
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