Finance and Accounting
International Corporate Finance
a. Right Fixtures Sdn Bhd, is a small Malaysian business in Kuala Lumpur that produces and sells lamp fixtures. Its costs and revenues have been very stable over time. Its profits have been adequate, but it has been searching for means of increasing profits in the future. It has recently been negotiating with Indian firm called Eastern fixtures, from which it will purchase some of the necessary parts. Every three months, Eastern will send a specified number of parts with the bill invoiced in Indian Rupees. By having the parts produced by Eastern fixtures, Right fixtures managers expect to save about 20 percent on production costs. Eastern fixtures are only willing to work out a deal if it is assured that it will receive a minimum specified amount. Right Fixtures will be required to use its assets to serve as collateral in case it does not fulfill its obligation of payments.

The price of parts will change over time in response to the cost of production. Right Fixtures recognizes that the cost to Eastern fixtures will increase substantially over time as a result of very high inflation rate in India. Therefore the price charged in Indian rupees likely will rise substantially every 3 months. However, Right fixtures believe that, because of the concept of Purchasing power parity (PPP), its Malaysian ringgit payments to Eastern fixtures will be very stable. According to PPP, if Indian inflation is much higher than Malaysian inflation, the Indian Rupee will weaken against the Malaysian ringgit by that difference. Since Right Fixtures does not have much liquidity, it could experience a severe cash shortage if its expenses are much higher than anticipated.
The demand for Right fixtures product has been very stable and is expected to continue that way. Since the Malaysian inflation rate is expected to be very low, Right fixtures will continue pricing its lamps at today’s prices (in dollars). It believes that by saving 20 percent on production costs it will substantially increase its profits. It is about ready to sign a contract with Eastern fixtures.

i. Describe a scenario that could cause Right fixtures to save even more than 20 percent on
production costs.

ii. Describe a scenario that could cost Right fixtures to actually incur higher production costs than if it is simply had the parts produced in Malaysia.
[10 marks]
iii. Do you think that Right fixtures will experience stable ringgit outflow payments to Eastern fixtures over time? Explain (Assume that the number of parts ordered is constant over time.)

iv. Do you think that Right fixtures risk changes at all as a result of its new relationship with Eastern fixtures company? Explain
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