MGMT 575 Group B Case Study 2 September 16, 2012 Samantha Allison Leah Bond Lisa Cochran Louis Latimer

Overview  Company Background  Statement of Problem  Courses of Action  Financial Information  Analysis  Recommendations  Conclusion  References

Company Background  Exacta, s.a. is major French machine tool manufacturer.  Currently sells within Europe and the United States.  Only 1/6 th of annual U.S. exports are subject to currency risk.  Interested in opening a new plant in N. Carolina, opening the door to potential new sales to Canada and Mexico.  N.C. plant will be a $380 million investment with expected annual revenues of $420 million and expected annual net profits of $52 million.

Statement of Problem  CEO and Finance Director are concerned with currency risks between Euro and Dollar.  Considering offsetting $380 million U.S. plant investment by issuing dollar bonds.  What would Exacta’s exposure be from new U.S. plant?  How would it change from the current exposure?  What is the most effective and inexpensive approach to hedging for that exposure?

Courses of Action  Option 1 – Finance the new plant by a $380 million bond issue in dollars.  Option 2 – Sell forward at the beginning of each year the expected revenues of the plant.

Financial Information  Two thirds output exported, mostly within the European Union.  Net-60 invoice produces one sixth current exposure to U.S. currency risk.  New plant in US expected cost $380 million.  Projected revenues of $420 million and net profit of $52 million annually.

Financial Information  What would Exacta’s exposure be from new U.S. plant?  How would it change from the current exposure?  What is the most effective and inexpensive approach to hedging for that exposure?

Analysis  Current Exchange Rates  Forward Exchange Rates  Spot Rates

Current Exchange Rates PriceChange%Change Day Range 52 Week Range EUR/USD % AUD/USD % GBP/USD % USD/JPY % EUR/JPY % EUR/GBP % USD/CAD % USD/CHF % Current Exchange Rates

QuoteDayWeekMonthYear 14-Sep-1213-Sep-127-Sep-1215-Aug Sep- 11 Quote % Chg Quote% ChgQuote % Chg Quote % Chg Quote Forex Spot Rates - 9 Majors EUR/CH F % % % % EUR/JP Y % % % % EUR/US D % % % % GBP/EU R % % % % GBP/US D % % % % USD/AU D % % % % USD/CA D % % % % USD/CH F % % % % USD/JP Y % % % % Current Spot Rate Exchange

Currency Conversion

CurrencyLastDay HighDay Low% ChangeBidAsk EUR/USD % GBP/USD % USD/JPY % USD/CHF % USD/CAD % AUD/USD % Current Currency Table

Recommendations  Exacta should choose Option 2: Sell forward at the beginning of each year the expected revenues of the plant Stability for Exacta and customer  Exacta should NOT choose Option 1: Must comply with U.S. regs for traded bonds Must register with SEC Very long process U.S. debt-rating agencies would determine credit worthiness

Conclusion  Exacta concerned with currency risks between Euro and Dollar.  Exacta should sell forward at beginning of each year expected revenues of the plant.

References Brealey, R., Myer, S., & Allen, F. (2011). Principles of corporate finance. (10th ed.). New York, NY: McGraw- Hill Irwin Currency Center. (2012). Retrieved September 15, 2012 from Currency hedging. (2011) Retrieved September 13, 2012 from dvedc1111/currency-hedging-essential-to- profiting-from-international- trade/article /?page=all Derivatives to Hedge Risk. (2010). Retrieved September 13, 2012 from 4.asp#axzz26PIszfXh

References Foreign currency hedging. (2010). Retrieved September 13, 2012 from currency-hedging.html Spot Exchange Rates. (2012). Retrieved September 15, 2012 from outlook.htm Yankee Bond. (2011). Retrieved September 13, 2012 from #axzz26PIszfXh