MASTER OF BUSINESS ADMINISTRATION

MGT 621 Introduction to Global Business

ASSIGNMENT

Instructions:
 Complete this cover sheet, which forms the first page of your
assignment submission.
Student declaration:

I declare that:
 I understand what is meant by plagiarism
 The implication of plagiarism has been explained to me by my
institution
 This assignment is all my own work and I have acknowledged any
use of the published and unpublished works of other people.

Student’s signature: Date: 27-Feb-2022

Total number of pages including this cover page : 9 Pages

Submission Date 27-Feb-2022 Due Date: 27-Feb-2022

Student ID 23-00268 Subject Code: MGT 621
Student’s Full Name Zin Myoo
Lecturer’s Name Kamal Dadashov
 Executive Summary

The Leaf Company Limited is one of the leading companies in Myanmar which is
producing a variety of organic coffee and tea. Now, the company is planning to export tea
bags from Myanmar to Singapore and to set up a subsidiary abroad in Singapore. Since
Singapore cannot locally cultivatee tea leave, the country requires to import tea from abroad.
The company is developing an international strategy for the profits of export sale by
evaluating foreign exchange risk and weighted average cost of capital.

1) Evaluating Foreign Exchange Risk of Singapore

The Singapore economy has its key feature of the extreme openness to trade and
capital flows. The size of total imports and exports has been approximately three times that of
GDP over the past three decades. In relation to capital flows, almost all forms of capital
controls and foreign exchange restrictions have been dismantled since 1978. As a
consequence of its small open nature, the Singapore economy has often been buffeted by
shocks from the external environment such as the downturn in the global electronics industry
in 1996-1997, the Asian crisis in 1997-1998, and the burst of the information technology
bubble in 2001 (Chow, 2008).

Since 1985, Singapore applied a more market‐oriented exchange regime, which

allowed Singapore dollar to float within an undisclosed bandwidth of a central parity. Since
then, the Singapore dollar is managed against a basket of currencies of its major trading
partners. The weights of one foreign currency in the basket depend on the trading volume
between that particular country and Singapore. The composition of the basket is revised
periodically to catch the most updated changes in Singapore’s trade patterns by Monetary
Authority of Singapore (MAS) (Xie, 2011).

This method of management is tightly connected with trade weighted exchange rate.
Under managed floating exchange rate, the extent of exposure to a basket of currencies is
limited. But firms are still exposed to each bilateral exchange rate shocks. Thus, when using
exchange rate of Singapore dollar against US dollar, the amount of firms’ sensitive to
exchange rate fluctuations increase. Furthermore, there is no big difference between using
actual exchange rate changes and unanticipated exchange rate changes, indicating that the

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unanticipated exchange rate changes are generally moving together with actual exchange rate
changes (Xie, 2011).

Foreign exchange risk means the effect of exchange rate changes on the value of the
firm or the possible direct loss or indirect loss in the firm’s cash flow, assets and liabilities,
net profit and, its stock market value from an exchange rate move. To evaluate the effect of
exchange rate movements on the profits of the export sales of the firm, it is important to
identify the type of risks exposed to the amount of risk encountered. There are three types of
exchange rate risk to be considered for a subsidiary abroad - transactions risk and translation
risk for short-term effects of currency movement and economic risk for long-term effects of
currency movement (Papaioannou, 2006).

Transaction risk occurs when a firm is importing or exporting goods and services. If the
exchange rate moves on transactional account exposure regarding with export contracts
(receivables) and import contracts (payables), an exchange rate change in the currency of any
such contract will create a direct transaction exchange risk to the firm.

Figure (1) below shows the historical exchange rate trend between U.S. Dollar (USD)
and Singapore Dollar (SGD) from 2012 to current for the last 10 years’ period. Based to the
data, it can be assumed that Singapore currency is not so weaken over 10 years’ period
relative to the U.S. Dollar and the exchange rate can be said as stable, so it can be said less
transaction risk for the international firms.

1.5
1.45
1.4
1.35
1.3
SGD

1.25
1.2
1.15
1.1
1.05
20122012201320132014201420152015201620172017201820182019201920192020202020212021
Year

Figure (1) Interactive historical exchange rate trend between U.S. Dollar (USD) and
Singapore Dollar (SGD) during last 10 years’ period (Source: macrotrends)

However, my business is to export the goods from Myanmar to Singapore which

means that the firms have to pay for labor and production costs in Myanmar Kyat (MMK)

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and sell the products in Singapore Dollar (SGD), and thus the revenue will be in SGD as
well. In this case, the evaluation of exchange rate movement between SGD and MMK is
required to take into account as it is playing a major role for the profits of export sales. Figure
2 below shows the historical exchange rate trend between Myanmar Kyat (MMK) and
Singapore Dollar (SGD) from 2012 to current for the last 10 years’ period.

Figure (2) Historical exchange rate trend between Myanmar Kyats (MMK) and Singapore
Dollar (SGD) during last 10 years’ period (Source: Xe Currency Data)

According to the graph above, the exchange rate movement was steadily increasing for
the last 10 years’ period and a little bit stable in 2020, possibly due to Covid-19 global
economic risk, but the exchange rate has gone sky-high since February 2021 due to the
impact of political critical and the coup occurred in Myanmar. Let’s take this case into a
scenario for my business. The company targeted to export 6,000 tea bags to Singapore for six
months (1,000 bags per month) and the cost of exporting each bag is 10 SGD per bags
(10,000 SGB for 1,000 bags per month). If the exchange rate in the first month is
1450MMK/SGD, so the company will cost 14,500,000 MMK for exporting 1,000 tea bags to
Singapore in the first month. If the Myanmar Kyat becomes weak in next month and move to
1500 MMK/SGD worth, then the company will be costing 15,000,000 MMK for exporting
1,000 tea bags to Singapore in the second month which means a loss of profits for 500,000
MMK just after one-month period.

Companies or business personnel who are exporting or importing goods in foreign

currencies, are at risk due to the foreign exchange rate movement. Fluctuations in the foreign
exchange rate can have significant impact on business profits and outcomes. Hedging means
managing to reduce those foreign exchange (forex) risk to an extent which could lead to
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volatile cash flows and losses. Forex risks can be hedged through the use of several different
contracts including futures, forwards, options, and swaps (Gaspar, el al., 2017)

In my firm, forward contract instrument will be utilized to manage exchange rate risk.
Forward contract is a customized agreement between two parties to fix the exchange rate for
a future transaction (Meera, 2002). There are different types of forward contracts - closed
outright, flexible, long-dated, and non-deliverable. The firm will be using long-dated forward
contract type since it can last much longer years of settlement date (Porter, 2021).

Translation risk is associated with the short-term effects of currency movements on the
consolidated accounting statements of a firm. This affects companies with foreign
subsidiaries. If the subsidiary is in a country with a weak currency, the subsidiary’s assets
will be less valuable in the consolidated accounts. Usually, it does not affect the day-to-day
cash flows of the firm. However, it would be important if the holding company wanted to sell
the subsidiary and remit the proceeds. It also becomes important if the subsidiary pays
dividends. However, the term ‘translation risk’ is usually reserved for consolidation effects. It
can be partially overcome by funding the foreign subsidiary using a foreign loan (Garrett,
2021).

Economic risk is associated with the ways in which long-term exchange rate movements
affect firms. Economic risk, which reflects basically the risk to the firm’s present value of
future operating cash flows from exchange rate movements. In essence, economic risk
concerns the effect of exchange rate changes on revenues (domestic sales and exports) and
operating expenses (cost of domestic inputs and imports). Economic risk is usually applied to
the present value of future cash flow operations of a firm’s parent company and foreign
subsidiaries. Identification of the various types of currency risk, along with their
measurement, is essential to develop a strategy for managing currency risk (Papaioannou,
2006).

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2) Evaluating the weighted average cost of capital of a subsidiary in Singapore

The cost of capital is the required rate of return demanded by stock and bond
investors. Weighted average cost of capital (WACC) is a key metric that show the cost of
capital of a firm across its debt and equity. If a firm’s WACC is elevated, the cost of
financing for the firm is higher, which is indicating the greater risk. So, WACC is often used
to determine if a company is worth investing in or lending money to (Jadeja, 2021). The
weighted average cost of capital (WACC) is a calculation of the cost of capital of a firm in
which each category of capital is proportionately weighted. All sources of capital, including
common stock, preferred stock, bonds, and any other long-term debt, are included in a
WACC calculation. WACC is calculated by multiplying the cost of each capital source (debt
and equity) by its relevant weight by market value, and then adding the products together to
determine the total (Seth, 2021).

The weighted average cost of capital for a firm is:

K = (Equity/Total Market Value) R + (Debt/Total Market Value) (1 – Tax Rate) I

Where Equity = market value of common and preferred stock outstanding

Debt = market value of long-term debt outstanding
R = cost of equity or required rate of return of equity holders
I = before-tax cost of debt or interest rate
Tax Rate = marginal tax rate of the firm
Total Market Value = Equity + Debt.
Let me take some assumptions to calculate WACC of The Leaf Company Limited that
I am planning to sell Myanmar tea in Singapore. During the fiscal year of 2021, the
company’s investment of tea in Singapore market generated a return of 6.5%. As per the
latest annual report, the company has an outstanding debt of SGD 500,000 and common
equity valued at SGD 1,000,000. During 2021, the company has incurred SGD 50,000 as
interest expense on its debt, the risk-free rate of return is 2.0%, the market return is 6.0% and
the company’s beta is 0.73. The company needs to calculate WACC based on those
conditions and evaluate if the investment return of 6.5% exceeds its cost of capital if the tax
rate is 22%. Below table shows the details of WACC calculations. According to the

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calculations, the WACC is 5.88% which is lower than the investment return of 6.5%. Thus,
the company is supposed to raise the money and invest.

Particulars Value

Total Debt $500,000

Total Equity $1,000,000

Interest Expense $50,000

Tax Rate 22%

Risk-free Return 2.0%

Beta 0.73

Market Return 6.0%

Total Capital is calculated using the formula given below

Total Capital = Total Debt + Total Equity

Total Capital $1,500,000

Weight of Debt is calculated using the formula given below

Weight of Debt = Total Debt / Total Capital

Weight of Debt 0.333

Cost of Debt is calculated using the formula given below

Cost of Debt = Interest Expense / Total Debt

Cost of Debt 10.0%

Weight of Equity is calculated using the formula given below

Weight of Equity = Total Equity / Total Capital

Weight of Equity 0.667

Cost of Equity is calculated using the formula given below

Cost of Equity = Risk-Free return + Beta * (Market Return - Risk-free Return)

Cost of Equity 4.9%

WACC is calculated using the formula given below

WACC = Weight of Equity * Cost of Equity + Weight of Debt *

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Cost of Debt * (1 - Tax Rate)

WACC 5.88%

References

1. Papaioannou, M. G. (2006). Exchange rate risk measurement and management: Issues and
approaches for firms.

Retrieved from https://www.elibrary.imf.org/view/journals/001/2006/255/article-A001-

en.xml?ArticleTabs=Related%20Documents

2. Xie, T. (2011). Foreign Exchange Rate Exposure in Hong Kong, Japan and Singapore:
Firm and Industry Level Analysis.

Retrieved from https://www.diva-portal.org/smash/record.jsf?

pid=diva2%3A423793&dswid=8472

3. Chow, H. K. (2008). Managing Capital Flows: The Case of Singapore. ADBI Discussion
Paper 86. Tokyo: Asian Development Bank Institute.

Retrieved from
http://www.adbi.org/discussion-paper/2008/02/21/2484.managing.capital.flows.singapore.cas
e/

4. Ganti, A. (2021). Transaction Risk.

Retrieved from https://www.investopedia.com/

5. Gaspar G.E., Kolari J. W., Hise R.T., Bierman L., Smith M., Arreola-Risa A. (2017)
Introduction to Global Business, 2nd Edition, Cengage, ISBN: 978-1-305-50118-8.

6. Meera, A. K. M. (2002). Hedging Foreign Exchange Risk with Forwards, Futures, Options
and the Gold Dinar: A Comparison Note. International Islamic University Malaysia.

Retrieved from https://www.lariba.com/sitephp/pdf/

7. Porter, TJ. (2021). What is a Forward Contract?

Retrieved from https://www.thebalance.com/forward-contract-5192871

8. Jadeja, V. (2021). Weighted average cost of capital: A measure of the rate companies pay
to finance their operations.

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Retrieved from https://www.businessinsider.com/weighted-average-cost-of-capital

9. Seth, S. (2021). What Is the Formula for Weighted Average Cost of Capital (WACC)?

Retrieved from https://www.investopedia.com/

10. Garrett, K. (2021). Foreign currency risk and its management

Retrieved from https://www.accaglobal.com/hk/

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