EXACTA, S. A. Presented by: Jamie Brazda (Knight) 2/08/2013
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Transcript of EXACTA, S. A. Presented by: Jamie Brazda (Knight) 2/08/2013
EXACTA, S. A.Presented by:Jamie Brazda (Knight)2/08/2013 The Company: Exacta, s. a., based in France, producer of precision machine tools(CEO: M. B. Bardot)
The Venture: Opening plant in South Carolina, with hopes of exporting to Canada & Mexico in the futureWhat do we know?*Approximately 2/3 of outputs are exported, mostly to E.U.
*Payments for exported goods are typically received within 2 months --> only 1/6 of U.S. exports exposed to currency risk at a time
Key Financials*Investment = $380 million (U.S. $)*Annual expected revenue = $420 million (Mostly U.S. $)*Net profits forecasted = $52 million p/year*Company is already exporting $320 million p/year to U.S. *2/3 of operating costs will be in U.S. $. *1/3 of operating costs would be from components brought in from Lyons plus the head office's charge for management services and use of patents.*Exacta has not decided if the U.S. $ or the euro will be used for the head office's charges for patents
The Problem What would Exacta's true exposure be from its new U.S. operations, and how would it change from the company's current exposure?
2. Given that exposure, what would be the most effective and inexpensive approach to hedging?
Potential Options for Management Review*M. Pangloss suggests financing the plant by $380 million issue of dollar bonds, to offset the dollar investment by a matching dollar liability.
*Company could also sell forward the expected revenues from the U.S. plant at the beginning of each year
Investment/Profits/Costs ConvertedExacta s. a. is better off to invoice its U.S. operation in Euros for the purchases from the parent company
+The value of the Euro is rising over the year.
+When payment is made, it will be worth more than if the U.S. plant paid in $
+Also beneficial to U.S. operation since they will have to come up with less Euros at end of year than they would have to U.S. $Should the remaining 1/3 operating costs be in U.S. $ or Euros??What would Exacta's true exposure be from its new U.S. operations, and how would it change from the company's current exposure?
Evaluation of Recommendation 1: Sell Fwd expected revenuesThey receive payment within 2 months of purchase for most exports. +Only 1/6 of money is subject to currency risk at any one time amount they lose (or gain) by selling forward is affected even less. +However, if the actual revenues fall short of the expectation, they company could end up in a bad spot.From the new U.S. Operations, Exacta s. a. has transaction exposure+Value of the $ is going to fall
+Transaction exposure is minimal
+Since value will fall by 0.042%, the company will see a 0.042% fall in Euro receipts.
+Exacta s. a. should sell forward U. S. $.
This is a change from current exposure because, now, most exports are exchanged in Euros transaction exposure is non-existent.Given that exposure, what would be the most effective and inexpensive approach to hedging?Evaluation of Recommendation 1: $380 million issue of dollar bondsUsing $380 million dollar bonds is a bad idea
+dollar bonds issued in U.S. $, worth a certain amount rather than a percentage
+dollar will fall in value over 1 year+if buyers hold bond for 1 year, they will lose money no one will buy these bonds
+dollar value is expected to rise in first 3 months+bondholders will sell bonds at 3 moth point so they lose less.+if Exacta s. a. used bond money as equity to finance U.S. plant, they wont have money for future payments if bonds are all sold at 3 monthsEvaluation of Recommendation 2: Sell Fwd expected revenues+The Euro is worth more in 1 year than it is now
+Selling fwd is a bad idea in terms of U.S. $+U. S. $ falling in value Exacta s. a. loses money up front by selling for what the $ will be worth in 1 year (a fwd discount)
+Selling fwd is a good idea in terms of Euros+Euro rising in value Exacta s. a. getting more for their money than they would using spot rate.+Exacta s. a. would be eliminating risk that spot rate would be even lower in 1 year. On average the forward rate and future spot rate are almost identical. This is important news for the financial manager; it means that a company that always uses the forward market to protect against exchange rate movements does not pay any extra for this insurance (Brealey, Myers, & Allen, 2011, p 683).
Evaluation of Recommendation 2: Sell Fwd expected revenuesSelling forward expected revenues is good, cheap insurance because spot rate and fwd rate are similar. References
Brealey, R. A., Myers, S. C., & Allen, F. (2011). Principles of corporate finance. (10 ed.). New York, NY: McGraw-Hill