AMK Ltd. an Indian based company has subsidiaries in U.S. and U.K.
Forecasts of surplus funds for the next 30 days from two subsidiaries are as below:
U.S. $12.5 million
U.K. £ 6 million
Following exchange rate informations are obtained:
Annual borrowing/deposit rates (Simple) are available.
The Indian operation is forecasting a cash deficit of Rs. 500 million. It is assumed that interest rates are based on a year of 360 days.
(i) Calculate the cash balance at the end of 30 days period in Rs. for each company under each of the following scenarios ignoring transaction costs and taxes:
- Each company invests/finances its own cash balances/deficits in local currency independently.
- Cash balances are pooled immediately in India and the net balances are invested/ borrowed for the 30 days period.
(ii) Which method do you think is preferable from the parent company’s point of view?
Solution
Cash Balances:
Acting independently Rs. 000
Immediate Cash Pooling
If the company decides to invest pooled amount of Rs. 4,84,080,000/- @ 6.2% p.a. for 30 days an interest of Rs. 2,501,080/- will accrue.
Immediate cash pooling is preferable as it maximizes interest earnings.
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