Question 2a
The Armstrong Group is a multinational group of companies. Today is 1 September. The treasury manager at Massie Co, one of Armstrong Group’s subsidiaries based in Europe, has just received notification from the group’s head office that it intends to introduce a system of netting to settle balances owed within the group every six months.
Previously inter-group indebtedness was settled between the two companies concerned.
The predicted balances owing to, and owed by, the group companies at the end of February are as follows:
| Owed by | Owed to | Local currency million (m) |
|---|---|---|
| Armstrong (USA) | Horan (South Africa) US $12·17 | 30% |
| Horan (South Africa) | Massie (Europe) | SA R42·65 |
| Giffen (Denmark) | Armstrong (USA) | D Kr21·29 |
| Massie (Europe) | Armstrong (USA) | US $19·78 |
| Armstrong (USA) | Massie (Europe) | €1·57 |
| Horan (South Africa) | Giffen (Denmark) | D Kr16·35 |
| Giffen (Denmark) | Massie (Europe) | €1·55 |
| D Kr | US$ | SA R | € | |
|---|---|---|---|---|
| 1 D Kr = | 1·0000 | 0·1823 | 1·9554 | 0·1341 |
| 1 US $ = | 5·4855 | 1·0000 | 10·7296 | 0·7358 |
| 1 SA R = | 0·5114 | 0·0932 | 1·0000 | 0·0686 |
| 1 € = | 7·4571 | 1·3591 | 14·5773 | 1·0000 |
Settlement will be made in dollars, the currency of Armstrong Group, the parent company. Settlement will be made in the order that the company owing the largest net amount in dollars will first settle with the company owed the smallest net amount in dollars.
Note: D Kr is Danish Krone, SA R is South African Rand, US $ is United States dollar and € is Euro.
Required:
(a) (i) Calculate the inter-group transfers which are forecast to occur for the next period. (8 marks)
(ii) Discuss the problems which may arise with the new arrangement. (3 marks)