Question

BF2207 Question 4 BreadTalk Group Ltd. is a Singaporean company that engages in bakery, food court, and restaurant businesses. It does business in Singapore and China. In attempting to assess its economic exposure, it compiled the following information: Its Singapore sales are somewhat affected by the value of the Chinese yuan (CNY) against the Singapore dollar (SGD) because it faces competition from Chinese fims. It forecasts the Singapore sales based on the following three exchange rate scenarios: Revenue from Singapore Business Probability Exchange Rate of CNY 200,000,000 SGD 0.150 SGD 20% 230,000,000 SGD 0.200 SGD 50% 250,000,000 SGD 0.250 SGD 30% Its CNY revenues on sales in China invoiced in CNY are expected to be 800 million CNY. It anticipated cost of materials is estimated at 180 million SGD from the purchase of Singapore materials and 100 million CNY from the purchase of China materials. Fixed operating expenses are estimated at 50 million SGD. Variable operating expenses are estimated at 20 percent of total sales (after including Chinese sales, translated to a SGD amount). Interest expense is estimated at 30 million SGD on existing SGD loans, and the company has no existing CNY loans. Forecast the net SGD cash flows for BreadTalk, accurate to the nearest dollar, under each of the three exchange rate scenarios. Explain how the forecasted net cash flows are affected by possible exchange rate movements. (a) (16 marks) Explain how BreadTalk can restructure its operations to reduce the sensitivity of its net cash flows to exchange rate movements without reducing its volume (b) of business in China. (6 marks) (TOTAL: 22 marks)

Answer 1

For Each Scenario, find the Total Cash In flow(TCI) from revenue & Total Cash Out Flow(TCO) from expenses.

Take note of below points which calculating the Cash flows

1. Each scenario, convert the CNY amount(Revenue & Material Costs) at the rate applicable for the scenario

2. Each scenario, find the variable expenses which is 20% of total revenue

		Scenario 1		Scenario 2		Scenario 3
		1 CNY	.15 SGD	1 CNY	.2 SGD	1 CNY	.25 SGD
			SGD		SGD		SGD
Cash In Flow	Revenue from SGD (A)		200		230		250
	Revenue from CNY (B)	800(*.15)	120	800(*.15)	120	800(*.15)	120
Total Cash In Flow	TCI = A + B		320		350		370
Cash Out Flow	Material Cost SGD (C )		-180		-180		-180
	Material Cost CNY (D)	-100(*0.15)	-15	-100(*0.2)	-20	-100(*0.25)	-25
	Total Material Cost (E=C+D)		-195		-200		-205
	Fixed Operating Cost (F)		-50		-50		-50
	Variable Operating Expense (G= .2*(A+B))	320*.2	-64	350*.2	-70	370*.2	-74
	Interest Expense (H)		-30		-30		-30
Total Cash Out Flow	TCO = E + F + G + H		-339		-350		-359
Net Cash Flow	TCI + TCO		-19		0		11