Question

Question 4 Centurion Ltd. and Allied Tech Ltd. are Singapore-based firms with subsidiaries in China that distribute precision metal parts, tools and supplies to customers throughout China. Both their subsidiaries purchase the products at cost and sell the products at markups. The other operating costs of the subsidiaries are very low. Centurion has a research and development center in Singapore that focuses on improving its production technology. Allied Tech has a similar center based in China. Each firm subsidizes its respective research and development center on an annual basis. Which firm is subject to a higher degree of economic exposure? Explain. (a) (6 marks) (b) To ascertain the exact nature of the economic exposure of these firms, you collected the following data on changes in their subsidiaries' cash flows and the value of the Chinese yuan (CNY) over the last eight quarters: Percentage Change (%) Centurion Subsidiary's Cash Flow Allied Tech Quarter Subsidiary's Cash Flow Value of CNY -4 -1 0 1 -2 0 -1 2 -3 -6 -1 3 -2 -5 0 4 2 1 5 0 -1 1 6 2 1 2 7 5 1 8 How would you go about to determine whether the difference in economic exposure of these firms is significant? (8 marks) (TOTAL: 14 marks)

Answer 1

1) WHICH FIRM IS SUBJECT TO A HIGHER DEGREE OF ECONOMIC EXPOSURE? EXPLAIN?

A)Both the firms has same alliance with and partners and are doing the same that they are doing so the economic exposure cant be predicted with the leverage it has but with the exposure of cash and other alliances allied tech subsidiary has more economic exposure because its rate of cash flow has been in the negative in the major quarters and if it continued for long the annual cash flows will be less and the company sooner or later will be liquidated and further more can be closed down so economic terms are quite vital and these terms will be crucial in understanding the further needs of the cash flows it can be annual or semi annual or quarter terms.

2) How would you go about to determine whether the difference in economic exposure of these firms is significant?

A) Yes both the firms has different economic exposure compared to each other and have the cash flows with the rates of quarters being in detail with 8 quarters the centurion stands at 0 and the alliance has -3 so by this we can easily say that it has more significant value compared with other.As centurion has been the more significant among the others with the yen also being utilized by the amount that was equated on the terms of the quarters and the 8th term gives the correct answer that is 5 so with this both the alliance gives perfect and write things which keeps significant increase in the firms development and the alliance has been the same with respect to each other and the economic terms has been varying with the adjusted cash flows.