Explain the benefits of Trendsetter plc cross listing their shares

Question no. 3 .

Solution :

  1. Explain the benefits of Trendsetter plc cross listing their shares in India following the Greenfield investment.

Solution : Cross Listing means to do the listing of a company’s ordinary shares on a different exchange other than its original stock exchange. So under Cross Listing a Company can list its share on multiple stock exchange.

Benefits of Cross Listing of Ordinary Shares.

  1. It increases liquidity for the companies to trade its shares in numerous time Zones and multiple currencies. Now suppose Trendsetter plc UK is a listing company in the London stock exchange. So dealing in the shares of this company in UK is easy and they kind find a lot of buyer and sellers. But it is quit difficult to attract the potential buyer and seller from around the globe.
  2. It reduces the cost of capital for the companies. This arises because their stocks a=become more available to foreign investors. If companies are not going for the cross listing their access to these stocks may otherwise restricted due to international investment barriers. Potential customers from foreign country are having a lot of hitch for investment as the companies as their Financial Reporting is not made according to their listing norms as well as the marketability is also very poor because It is not listed into the market .
  3. It increases the disclosure norms. It improves the companies information environment. It also increases the media awareness as when companies enter to new market it spend also on publicity and public awareness. It increases the confidence of the investor also in the foreign country.
  4. It increases the protection of the investor as companies commit to higher standard of corporate governance. Investor feel safe to invest in these cross listed companies.

We have discussed about the benefits of cross listing. Now with the reference of the above point we can explain the benefits of Trendsetter plc UK after listing in the Indian Stock Exchange as greenfield investments.

Benefit of Trendsetter plc UK cross listing of the share.

  1. As company entering as greenfield investments the door of the Indian capital market will open for this company and they can easily attract a large number of investor in India who will Invest in the Company.
  2. This will be beneficially for the operational of the company as with the publicity the public awareness will increase immensely as Investor as well as for consumer also if they want to make some consumer base in the country.
  3. A large number of Investment will reduce the cost of capital for the company.
  4. As The Trendsetter plc Uk will follow the SEBI norms and other compliances as well as Corporate Governance in India it will increase the Confidence of Indian Investors.

B ) A large number of exports are made to the US. Explain the potential benefits of Trendsetter plc UK borrowing in the USA.

Answer: As we know that the Trendsetter plc UK is exposed to operation exposure due to large number of consumer base in the USA. They would be having a lot of Accounts Receivables form the USA. For hedging of the FOREX Risk in the USA they have to use lot of Hedging techniques in the USA.

Some of the hedging techniques are as follows .

  1. Hedging through forward contract
  2. Hedging through future contract
  3. Hedging through money market
  4. Hedging through option market .

Now if we understand the situation of hedging through money market the hedging approach is very simple . Suppose there are accounts receivables with 6 months credit period. What the company will do that it will borrow from the US market the present value of amount discounted with the borrowing rates of the US for 6 months time . on the spot date company will receive the payment from accounts receivables and it will pay back the borrowing amount with interest. So an operational exposure risk is hedge with money market operations.

Secondly as the large number of exports are there in the USA. With this kind of financial credentials and having a lot of liquidity in the US market Trendsetter plc can plan for long term borrowing from the US market. This will help them to fund for investment in the future and reduce its cost of capital and hedging also could be done with the payment of interest as well as for repayment. Company will have very low risk level at the time of repayment of principal as well as interest as they are having a lot of accounts receivables in the USA.

  1. ) Explain what is meant by (i) a segmented market and (ii) an illiquid market and discuss their potential impact on a company’s cost of capital .

Answer : Segmented Market : Segmented Market concept is used for marketing of the product as well as services. But here we are going to study from the angle of cross listing. So companies world wide divide the market according to different segments. The purpose of segmentation is very simple, Companies give weighted to different market on the basis of Investor base, Amount of capital available for investment , reporting norms , disclosure norms, corporate governance, as well as the cost of the available funds. For an example the cost of capital in India comes to approximately 12 %, in the US it is approximately 4%, in Europe it is approximately 6%, in Japan it is 2%. Corporate also see the marketability of different stock exchange like NASDAQ, New York stock exchange, London stock exchange, Luxemburg stock exchange, these exchange has better marketability as well as a lot of capital. So company divide the investor market on the basis of different segment and it reduces the overall cost of capital and increase the liquidity also .

Illiquid Market : Illiquid Market means where it is very difficult to sell the company security. As we have taken some name of world famous stock market, we can also have example of some Stock exchange of Africa, or you see in India we are having Bombay stock exchange and national stock exchange are highly liquid market but there were a stock exchange called Magadha stock exchange and the liquidity position was so bad that it was decided to close down and it is become non operational today. Like wise we are having hundred of stock exchange which is highly illiquid. Even you list your share there are very few potential buyers, cost of capital is very high and the amount of capital availability is very less. This type of market is called illiquid market. With having all negativity the biggest problem is that their cost of capital is very high and if you operate in those type of stock exchange you will get less capital and it will adversely increase the cost of capital of the company .

Q no. 4. Solution:

a). Calculation of the net present value of the investment for Trendsetter plc.

Cost of Capital is 15%.

We have to calculate the net present value of the joint venture investment in Amulta Limited .

Particulars

Year/ Cash flows

Amount in Rupees( Million)

Foreign exchange rate forecasted

(Rupees / )

Amount in ( Million)

Discounting Factor at cost of capital 15 %

Present Value ( ) Million

Year 0

(400)

86

(4.6512)

1

(4.6512)

Year 1

200 – 30 = 170

85

+ 2

.8696

1.7392

Year 2

300 - 30= 270

85

+3.1765

.7562

2.4021

Year 3

100 - 50 = 50

84

+ 0.5952

.6576

0.3914

NPV

(.1185)

With the above calculation we are able to see that there is a negative NPV . Hence appraisal on the basis of NPV for this joint venture would be difficult. We may select this investment proposal on the basis of other criteria.

As far as additional Cash inflow in information may be irrelevant for this investment proposal . as these cash inflows are seems to be the inflows of Trendsetter plc UK from UK operation.

B.) Solution :

An alternative to the joint venture for three years Trendsetter plc UK wan to setup a subsidiary in India. So there will be FDI in India .

Points to be considered from the perspective of Trendsetter plc UK.

  1. As we have seen that joint venture is always there for short period of time and if the parent company wants more control on the operation, Supplies of leather than it would be better to bring FDI and invest in India, start a subsidiary.
  2. As a subsidiary they can give better offer to Amulta Limited and invest more than 51 % in this company, if possible invest 100% and have full control of the company and its supplies.
  3. Being an holding company you can bring some new technology for product improvement, Implementation of ERP system for immigration of operation for better management and control .
  4. If Amulta Limited refused to sell than holding can start a subsidiary in greenfield project.
  5. If it acquire Amulta Limited it can stop the sourcing of leather supply to their competitors.

Points to be considered from the perspective of Amulta Limited as subsidiary.

  1. As a joint venture investment it will have a lot of autonomy.
  2. If they accept the offer of becoming subsidiary than their autonomy will be effected and the local management loss the control of the company as majority stake is purchased by the holding company.
  3. Any kind of new innovation or future development will be stopped.
  4. After becoming subsidiary company it will loose the chance for future growth.

Additional perspective from the Trendsetter plc Uk.

  1. As they have invested in the Amulta limited they have to control the operation of raw material production also where they were not specialized, hence they can offer to the present management to be continued with better package.
  2. As the holding company is having international exposure they can bring new technology to improve the future operations.
  3. They have to the hedging for their operation exposure of Forex which will be not a major issue as there were doing it in past also .
  4. They have to start hedging for their translation exposure now as they have invested in the FDI.
  5. They have to also follow the FDI norms and their reporting norms also which earlier were not required .

C.) Answer :

As India is a developing nation and now they have opened their economy to the world and relaxed the terms and condition of FDI in India. But still there are a lot of other risk involve with the FDI in India which is know as political risk, a change in the new govt. may spoil all the plan than we are having economic risk. Hence it is better to wait and watch for some time and instead of investing as FDI go and do the joint venture for three years . In the three years times Parent company will be able to analyzed the all type of investment risk associated in India. In this period they can also analyze that is there are better opportunity available in the rest of the world in comparison with India . hence it would be suggested that even the NPV is negative for the cash flows for the joint venture, we have earlier also discussed that on the basis of NPV techniques we will decline the joint venture projects but we will do some real option analysis and on the basis of weighted given for all the other consideration it is better to select the project and invest in the joint venture . even we are getting small negative NPV we will get three years time to analyze the subsidiary investment proposal and than we may invest in the future with better and strong plan.

References : International Financial Management by Eun/ Resnick – Tata mcgraw HILL

  1. Strategic Financial management by R P RUSTAGI- sultan chand & sons
  2. The analysis and use of FINANCIAL STATEMENTS by Gerald I. white, Dov Fried, Ashwinpaul C- willy student edition
  3. International Financial Management – Kester w carl- Course Development Research seminar- Harvard Business school.S
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