Final Project

INTERNATIONAL FINANCE

Lecturer: Nguyễn Vân Hà

Student Name: Nguyễn Hoàng Trường
ID: 18071260
Class: INS303204
 Table of Contents
A. Introduction............................................................................... 3
B. Main Body ................................................................................ 3
I. Capital Structure .................................................................................. 3
II. Evaluation .......................................................................................... 4
II.1. Base case .................................................................................................. 4
II.2. Exchange rate fluctuation ........................................................................ 5
II.3. Hedged exchange rates ............................................................................ 6
II.4. Financing arrangement ............................................................................ 6
II.5. Blocked fund ............................................................................................ 7
C. Conclusion ................................................................................ 8
A. Introduction
Winds, Inc. is a manufacturer and trader of electric fans from Korea. The company was
established in 2012 and has been in business for 10 years in this industry. In 2022, the
company wants to expand its business to foreign country by opening a subsidiary and
specifically in Vietnam.
This report will analyze and evaluate the financial feasibility of this project when assessing
the financial factors that the company will encounter such as tax problems, inflation,
exchange rate differences, etc. Part 1 of the report will present the project's capital structure
(including domestic and foreign mobilized capital). By applying the exchange rate condition
to the calculation, the company will sum up the total initial investment and the Weighted
Average Cost Of Capital (WACC) for this project.
In part II, from the total initial investment, Winds, Inc. will prepare a capital budget to
evaluate the feasibility of this project along with the risks that the company may face
including: Exchange rate fluctuations, Hedged Exchange rates, Financing Arrangement and
Blocked Fund in the host country.

B. Main Body
I. Capital Structure
According to data from banks in Vietnam and Korea, the company found that, due to the
Covid epidemic, banks' interest rates have decreased. Therefore, the company's main source
of capital mobilization will come from bank loans. Specifically, the bank loan interest rate
in Korea is 1% (Trading Economics, Dec/2021) and the bank loan interest rate in Vietnam is
4% (Trading Economics, Dec/2021). Therefore, the interest rate in Korea is lower, the
company decided to borrow 300,000,000 Won from a Korean bank with an interest rate of
1% a year and borrow from a Vietnamese bank 100,000,000 Won at an interest rate of 4% a
year. Besides bank loans, the company also issues bonds in Korea to increase capital.
Specifically, the company issues 20,000 bonds with par value of 10,000 Won each. Thereby
earning 200,000,000 Won with Yield to Maturity = 7%. To diversify capital sources, Winds,
Inc. issues shares in both Korea and Vietnam. Specifically, in Korea, the company raised
200,000,000 Won through the issuance of 200,000 shares at a value of 1,000 Won per share.
In Vietnam, the Company issues shares to raise capital 150,000,000 Won. The company's
Retained Earning from the old project is 50,000,000 Won. The exchange rate of Won to
VND is 1Won = 19VND. The corporation tax that the Korean government imposes on
companies is 15%.
 We have:
*Debt:
- Korean bank’s loan:300,000,000Won - 1% annually
- Vietnamese bank’s loan: 100,000,000Won - 4% annually
- Issues bonds in Korea: 20,000 bonds x 10,000 Won = 200,000,000 Won - YTM=7%
*Equity:
- Market data in Korea: Treasury rate = 4%, Equity risk premium = 5%, Beta of the
company = 1.1
- Market data in Vietnam: Treasury rate = 6.2%, Equity risk premium = 4%, Beta of the
company = 0.9
- Issues stocks in Korea: 200,000,000 Won - 9.5%
(Using CAPM, Re=Rf + β*ERF= 4%+1.1*5%=9.5%)
- Issues stocks in Vietnam: 150,000,000 Won - 9.8%
(Using CAPM, Re=Rf + β*ERF= 6.2%+0.9*4%=9.8%)
- Retained Earning : 50,000,000 Won - 9.5%
-Exchange rate of VND = 0.052Won
- Tax rate =15%
*Total Capital = 300,000,000 + 100,000,000 + 200,000,000 + 200,000,000 + 150,000,000 +
50,000,000 = 1,000,000,000 Won
=>> WACC=300,000,000/1,000,000,000*1%*(1-15%) +
100,000,000/1,000,000,000*4%*(1-15%) + 200,000,000/1,000,000,000*7%*(1-15%) +
200,000,000/1,000,000,000*9.5% + 150,000,000/1,000,000,000*9.8% +
50,000,000/1,000,000,000*9.5% = 5.63%
II. Evaluation
II.1. Base case
The project is only allowed to be implemented when the Present Value of the future
cash flow (included Salvage Value) exceeds The initial investment.
Year 0 Year 1 Year 2 Year 3 Year 4
1 Demand 40,000 50,000 60,000 80,000
2 Price per unit 450,000.00 ₫ 500,000.00 ₫ 550,000.00 ₫ 650,000.00 ₫
3 Total revenue 18,000,000,000.00 ₫ 25,000,000,000.00 ₫ 33,000,000,000.00 ₫ 52,000,000,000.00 ₫
4 Variable cost per unit 150,000.00 ₫ 153,150.00 ₫ 156,366.15 ₫ 159,649.84 ₫
5 Total variable cost 6,000,000,000.00 ₫ 7,657,500,000.00 ₫ 9,381,969,000.00 ₫ 12,771,987,132.00 ₫
6 Annual lease expense 100,000,000.00 ₫ 102,100,000.00 ₫ 104,244,100.00 ₫ 106,433,226.10 ₫
7 Other fixed expenses 200,000,000.00 ₫ 204,200,000.00 ₫ 208,488,200.00 ₫ 212,866,452.20 ₫
8 Noncash expense (Depreciation) 300,000,000.00 ₫ 300,000,000.00 ₫ 300,000,000.00 ₫ 300,000,000.00 ₫
9 Total expenses 6,600,000,000.00 ₫ 8,263,800,000.00 ₫ 9,994,701,300.00 ₫ 13,391,286,810.30 ₫
10 Before-tax earnings of subsidiary 11,400,000,000.00 ₫ 16,736,200,000.00 ₫ 23,005,298,700.00 ₫ 38,608,713,189.70 ₫
11 Host government tax (13%) 1,482,000,000.00 ₫ 2,175,706,000.00 ₫ 2,990,688,831.00 ₫ 5,019,132,714.66 ₫
12 After-tax earnings of subsidiary 9,918,000,000.00 ₫ 14,560,494,000.00 ₫ 20,014,609,869.00 ₫ 33,589,580,475.04 ₫
13 Net cashflow to subsidiary 10,218,000,000.00 ₫ 14,860,494,000.00 ₫ 20,314,609,869.00 ₫ 33,889,580,475.04 ₫
14 VND Remitted cash flow by subsidiary (100%) 10,218,000,000.00 ₫ 14,860,494,000.00 ₫ 20,314,609,869.00 ₫ 33,889,580,475.04 ₫
15 Withholding tax on remitted funds (8%) 817,440,000.00 ₫ 1,188,839,520.00 ₫ 1,625,168,789.52 ₫ 2,711,166,438.00 ₫
16 VND Remitted after withholding taxes 9,400,560,000.00 ₫ 13,671,654,480.00 ₫ 18,689,441,079.48 ₫ 31,178,414,037.04 ₫
17 Salvage value 28,846,153,846.15 ₫
18 Exchange rate of VND ₩0.052 ₩0.052 ₩0.052 ₩0.052
19 CF to parent in Korea ₩488,829,120.00 ₩710,926,032.96 ₩971,850,936.13 ₩3,121,277,529.93
20 Present value of parent cash flows (5.63% discount rate) -₩1,000,000,000.00 ₩462,774,893.50 ₩637,161,987.22 ₩824,589,533.42 ₩2,507,167,022.33
21 Initial investment by parent -₩1,000,000,000.00
22 Cumulative NPV -₩537,225,106.50 ₩99,936,880.72 ₩924,526,414.13 ₩3,431,693,436.46
23 NPV ₩3,431,693,436.46
24 IRR 67.33%
25 Discounted payback period 1.8432

Vietnam's inflation rate is 2.1%/year. From there, we can calculate the change in fixed
and variable costs to create a product over the years.
Assume that the company will do business in Vietnam for 4 years. After 4 years, the
parent company will sell the subsidiary to the Vietnamese government for 1,500,000,000
Won. Assume that the exchange rate stays the same for 4 years at 1VND=0.052Won.
Salvage value of the company equals 28,846,153,846.15VND.
When transferring money to the parent company in Korea, the Vietnamese government
commits that the cash flow of the subsidiary transferred to the parent company will be
100%, but the company will have to pay a Withholding tax of 8%. The funds must first be
converted into Korean Won at the current exchange rate before being converted. The money
received from the subsidiary are not subject to Korean corporation taxes because it was
believed that the parent would obtain credit for the taxes paid in Vietnam on a regular basis.
The cumulative NPV for each period indicates how much of the initial outlay has been
recovered by discounted cash flows up to that time. As a result, it can be used to calculate
how long it will take to recoup the initial investment.
In this Project, we calculated the Net Present Value is 3,431,693,436.46 Won. The IRR
equal 67.33% . This project can be accepted because the NPV is positive and the IRR is
relatively high. It means this project is potential. Moreover, the discounted payback period
is just 1.84 years.
II.2. Exchange rate fluctuations
Although exchange rates fluctuate over time and no corporation can predict when the
VND will grow or fall, multinational capital budget analysis can at least incorporate
multiple exchange rate scenarios, such as pessimistic and optimistic scenarios. The parent
firm will gain from the rise in VND since the income earned by the subsidiary and sent to it
will be transformed into more Won. Depreciation of VND, on the other hand, will have a
negative impact on cash flow since money collected by the subsidiary and sent to the parent
firm will be converted into fewer Won.
Year 0 Year 1 Year 2 Year 3 Year 4
1 VNĐ Remitted after withholding taxes (including salvage value) 9,400,560,000.00 ₫ 13,671,654,480.00 ₫ 18,689,441,079.48 ₫ 60,024,567,883.19 ₫
2 Strong - VNĐ Scenario
3 Exchange rate of VNĐ ₩0.053 ₩0.054 ₩0.056 ₩0.057
4 Cash flow to parent ₩498,229,680.00 ₩738,269,341.92 ₩1,046,608,700.45 ₩3,421,400,369.34
5 Present value of parent cash flows (5.63% discount rate) -₩1,000,000,000.00 ₩471,674,410.68 ₩661,668,217.50 ₩888,019,497.53 ₩2,748,240,774.47
6 Initial investment by parent -₩1,000,000,000.00
7 Cumulative NPV -₩528,325,589.32 ₩133,342,628.18 ₩1,021,362,125.70 ₩3,769,602,900.18
8 NPV ₩3,769,602,900.18
16 IRR 71%
18 Discounted Payback Period 1.80
9 Weak - VNĐ Scenario
10 Exchange rate of VNĐ ₩0.051 ₩0.050 ₩0.048 ₩0.047
11 Cash flow to parent ₩479,428,560.00 ₩683,582,724.00 ₩897,093,171.82 ₩2,821,154,690.51
12 Present value of parent cash flows (5.63% discount rate) -₩1,000,000,000.00 ₩453,875,376.31 ₩612,655,756.94 ₩761,159,569.31 ₩2,266,093,270.18
13 Initial investment by parent -₩1,000,000,000.00
14 Cumulative NPV -₩546,124,623.69 ₩66,531,133.26 ₩827,690,702.56 ₩3,093,783,972.74
15 NPV ₩3,093,783,972.74
17 IRR 63%
19 Discounted Payback Period 1.891

We can see in the above chart that, in the Strong Scenario, The NPV is highest. It means
parent company will receive more money when the exchange rate of VNĐ increases. In the
other hand, NPV of Weak Scenario is lowest, it mean parent will receive less money when
exchange rate of VNĐ decreases. Therefore, we can conclude that the strong VNĐ will
bring back more benefits for the company and the time company can break even is also
shorter (1.8 years).
II.3. Hedged Exchange Rates
Because exchange rates change over time and are unpredictable. Therefore, the company
needs to take measures to protect cash flow in the event of a fall in the exchange rate. In this
case, the company decides to use a forward contract to protect the cash flow transferred to
the parent company.
Using exchange rate in base case is the Expected future exchange rate of VND
(0.052Won). Assume the company will protect a cash flow of 5,000,000,000VNĐ per year
as this is the minimum amount of income the subsidiary is expected to receive and remit to
the parent company in any given year. Any subsequent cash flows that the subsidiary
receives annually (in excess of 5,000,000,000VNĐ) will not be insured. Suppose the
company uses a Forward Contract with an exchange rate of 1 VNĐ=0.05 Won. The insured
amount when converted to Won will use the Forward Contract exchange rate of 0.05Won.
The remaining amount that is not protected along with the Salvage Value will be converted
to Won at the Expected future exchange rate. The company uses a forward rate lower than
the Expected future exchange rate to evaluate the feasibility of the project in the case that
the Forward Contract is used but the market exchange rate rises higher.
Year 0 Year 1 Year 2 Year 3 Year 4
1 Total VNĐ Remitted after withholding taxes 9,400,560,000.00 ₫ 13,671,654,480.00 ₫ 18,689,441,079.48 ₫ 31,178,414,037.04 ₫
2 Hedged VNĐ cash flows remitted after withholding taxes 5,000,000,000.00 ₫ 5,000,000,000.00 ₫ 5,000,000,000.00 ₫ 5,000,000,000.00 ₫
3 Unhedged VNĐ cash flows 4,400,560,000.00 ₫ 8,671,654,480.00 ₫ 13,689,441,079.48 ₫ 26,178,414,037.04 ₫
4 Salvage value 28,846,153,846.15 ₫
5 Forward rate of VNĐ ₩0.050 ₩0.050 ₩0.050 ₩0.050
6 Expected future exchange rate of VNĐ ₩0.052 ₩0.052 ₩0.052 ₩0.052
7 Hedged cash flows to parent ₩250,000,000.00 ₩250,000,000.00 ₩250,000,000.00 ₩250,000,000.00
8 Unhedged cash flows to parent ₩228,829,120.00 ₩450,926,032.96 ₩711,850,936.13 ₩2,861,277,529.93
9 Total cash flows to parent ₩478,829,120.00 ₩700,926,032.96 ₩961,850,936.13 ₩3,111,277,529.93
10 PV of parent cash flows (based on 5.63% discount rate) -₩1,000,000,000.00 ₩453,307,886.02 ₩628,199,564.16 ₩816,104,800.80 ₩2,499,134,519.62
11 Initial investment by parent -₩1,000,000,000.00
12 Cumulative NPV -₩546,692,113.98 ₩81,507,450.18 ₩897,612,250.98 ₩3,396,746,770.60
13 NPV ₩3,396,746,770.60
14 IRR 67%
15 Discounted payback period 1.8703

In this situation, the project is still regarded to be advantageous because the Cumulative
NPV and IRR are both positive. The NPV is, nevertheless, slightly smaller than in the Base
scenario.

II.4. Financing Arrangement

In the Base case, Winds, Inc. spent about 100,000,000 VND per year to rent a factory for
production. Suppose that the company decides not to lease the factory anymore, but instead
buys land and builds its own factory. The company decided to raise another 150,000,000
Won to buy land and build factories. This extra capital will be raised by issues bonds in
Vietnam with the Yield to Maturity is 10%. The new capital structure is:
*Debt:
- Korean bank’s loan:300,000,000Won - 1% annually
- Vietnamese bank’s loan: 100,000,000Won - 4% annually
- Issues bonds in Korea: 20,000 bonds x 10,000 Won = 200,000,000 Won - YTM=7%
- Issues bonds in Vietnam: 150,000,000 Won - YTM=10%
*Equity:
- Issues stocks in Korea: 200,000,000 Won - 9.5%
- Issues stocks in Vietnam: 150,000,000 Won - 9.8%
- Retained Earning : 50,000,000 Won - 9.5%
-Exchange rate of VND = 0.052Won
- Tax rate =15%
*Total Capital = 300,000,000 + 100,000,000 + 200,000,000+150,000,000 + 200,000,000 +
150,000,000 + 50,000,000 = 1,150,000,000 Won
The new WACC is:
=>>WACC=300,000,000/1,150,000,000*1%*(1-15%) +
100,000,000/1,150,000,000*4%*(1-15%) + 200,000,000/1,150,000,000*7%*(1-15%) +
150,000,000/1,150,000,000*10%*(1-15%) + 200,000,000/1,150,000,000*9.5% +
150,000,000/1,150,000,000*9.8% + 50,000,000/1,150,000,000*9.5% = 6.004%
Due to the sharp increase in land prices in Vietnam in the coming years, Winds, Inc. is
expected to sell the purchased land and factory for 200,000,000 Won. So the Salvage Value
of Company is 1,700,000,000 Won = 32,692,307,692.31VND.
Year 0 Year 1 Year 2 Year 3 Year 4
1 Demand 40,000 50,000 60,000 80,000
2 Price per unit 450,000.00 ₫ 500,000.00 ₫ 550,000.00 ₫ 650,000.00 ₫
3 Total revenue 18,000,000,000.00 ₫ 25,000,000,000.00 ₫ 33,000,000,000.00 ₫ 52,000,000,000.00 ₫
4 Variable cost per unit 150,000.00 ₫ 153,150.00 ₫ 156,366.15 ₫ 159,649.84 ₫
5 Total variable cost 6,000,000,000.00 ₫ 7,657,500,000.00 ₫ 9,381,969,000.00 ₫ 12,771,987,132.00 ₫
6 Annual lease expense
7 Other fixed expenses 200,000,000.00 ₫ 204,200,000.00 ₫ 208,488,200.00 ₫ 212,866,452.20 ₫
8 Noncash expense (Depreciation) 300,000,000.00 ₫ 300,000,000.00 ₫ 300,000,000.00 ₫ 300,000,000.00 ₫
9 Total expenses 6,500,000,000.00 ₫ 8,161,700,000.00 ₫ 9,890,457,200.00 ₫ 13,284,853,584.20 ₫
10 Before-tax earnings of subsidiary 11,500,000,000.00 ₫ 16,838,300,000.00 ₫ 23,109,542,800.00 ₫ 38,715,146,415.80 ₫
11 Host government tax (13%) 1,495,000,000.00 ₫ 2,188,979,000.00 ₫ 3,004,240,564.00 ₫ 5,032,969,034.05 ₫
12 After-tax earnings of subsidiary 10,005,000,000.00 ₫ 14,649,321,000.00 ₫ 20,105,302,236.00 ₫ 33,682,177,381.75 ₫
13 Net cashflow to subsidiary 10,305,000,000.00 ₫ 14,949,321,000.00 ₫ 20,405,302,236.00 ₫ 33,982,177,381.75 ₫
14 VND Remitted cash flow by subsidiary (100%) 10,305,000,000.00 ₫ 14,949,321,000.00 ₫ 20,405,302,236.00 ₫ 33,982,177,381.75 ₫
15 Withholding tax on remitted funds (8%) 824,400,000.00 ₫ 1,195,945,680.00 ₫ 1,632,424,178.88 ₫ 2,718,574,190.54 ₫
16 VND Remitted after withholding taxes 9,480,600,000.00 ₫ 13,753,375,320.00 ₫ 18,772,878,057.12 ₫ 31,263,603,191.21 ₫
17 Salvage value 32,692,307,692.31 ₫
18 Exchange rate of VND ₩0.052 ₩0.052 ₩0.052 ₩0.052
19 CF to parent in Korea ₩492,991,200.00 ₩715,175,516.64 ₩976,189,658.97 ₩3,325,707,365.94
20 Present value of parent cash flows (6.004% discount rate) -₩1,150,000,000.00 ₩465,068,487.98 ₩636,455,628.50 ₩819,534,880.53 ₩2,633,874,141.93
21 Initial investment by parent -₩1,150,000,000.00
22 Cumulative NPV -₩684,931,512.02 -₩48,475,883.52 ₩771,058,997.02 ₩3,404,933,138.95
23 NPV ₩3,404,933,138.95
24 IRR 59.54%
25 Discounted payback period 2.0592

In this case, the NPV is positive, IRR is lower and discounted payback period is longer
than base case. The NPV is also a little lower than base case but this scenario will still good
for company but not as optimal as renting a factory in the base case.
II.5. Blocked Funds
Suppose in the case that the Vietnamese government requires the subsidiary not to let the
cash flow out of Vietnam until the subsidiary is sold back to the Vietnamese government.
The cash flow is now blocked in Vietnam. The subsidiary is required to use this money to
reinvest and generate profits. If the return on the reinvested funds is less than the project's
needed rate of return, the project is penalized with blocked funds.
Realizing that stock investment is a potential investment channel in Vietnam in the
coming years. The company decides to invest in real estate stocks with an estimated return
of 15% a year after tax.

Year 0 Year 1 Year 2 Year 3 Year 4

1 VNĐ to be remitted by subsidiary 9,400,560,000.00 ₫ 13,671,654,480.00 ₫ 18,689,441,079.48 ₫ 31,178,414,037.04 ₫
VNĐ accumulated by reinvesting funds to be
2 remitted remitted by subsidiary 85,049,111,018.24 ₫
3 Withholding tax (8%) 6,803,928,881.46 ₫
4 VNĐ remitted after withholding taxes 78,245,182,136.78 ₫
5 Salvage value 28,846,153,846.15 ₫
6 Exchange rate 0.052
7 Cash flows to parent ₩5,568,749,471.11
8 PV of parent cash flows (5.63% discount rate) -₩1,000,000,000.00 ₩4,473,099,522.78
9 Initial investment by parent -₩1,000,000,000.00
10 Cumulative NPV -₩1,000,000,000.00 -₩1,000,000,000.00 -₩1,000,000,000.00 ₩3,473,099,522.78
11 IRR 347%
12 Discounted payback period 3.224

The cumulative NPV of project is positive and higher than the base case. The IRR is very
high. It means this project is really potential.
However, there is a problem that putting all the cash flow into one year makes the cash
flow to the parent company will depend heavily on the exchange rate. Therefore, the
company needs to consider measures to hedge the exchange rate.

C. Conclusion
In this report, we looked at the change in NPV and IRR, as well as the Discounted payback
period, all with the purpose of establishing whether or not the project is viable. As a result,
we observed that the net present value (NPV) and internal rate of return (IRR) are always
positive, and the time it takes for the company to break even is also fair (almost all the
cases). However, we identified a number of additional elements that might have an
influence on the project's feasibility.
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