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Fin 570: International Finance Dr. Greco, Summer 2009

Wiley International. Fin 570: International Finance Dr. Greco, Summer 2009 Rezene A. • Calvin C. • Edward M. • Vince T. • Tiffany T. WI. About Wiley International. Manufacturer of motors and components “Wiley Inc.” to “Wiley International” Best managers assigned to foreign divisions

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Fin 570: International Finance Dr. Greco, Summer 2009

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  1. Wiley International Fin 570: International Finance Dr. Greco, Summer 2009 Rezene A. • Calvin C. • Edward M. • Vince T. • Tiffany T. WI

  2. About Wiley International • Manufacturer of motors and components • “Wiley Inc.” to “Wiley International” • Best managers assigned to foreign divisions • Regional managers propose to HQ • Made separately due to difficulties in risk differences

  3. About Wiley International Richard Esposito’s new policy • Uniform domestic and foreign decision making process • Regional managers to provide project’s FCFs and NPV • Apply U.S. hurdle rate of 9% to all international projects • New policies speed up decision making • Consider non-quantifiable factors

  4. The Brazilian Proposal Purpose: Increase production capacity • Finance a new manufacturing plant • Increase market share and profit margin • Gain competitive advantage • Foreign firms who face trade barriers • Small domestic firms with a history of quality problems

  5. The Brazilian Proposal Purpose of Request • Quality of workforce and regulations • Take advantage of incentive programs from Brazilian government • Division requests – at R$2.8/US$1:

  6. The Brazilian Proposal Financial Justification • R$6m training expensed for taxes • R$30m will be using 5-year straight-line depreciation ProjectFinancing • Purchase equipment from Japan • Financing 80% of project with 5-year loan denominated in Yen at 0.5%

  7. Project’s IRR is calculated using CFs denominated in Real while U.S. hurdle rate is 9% 5.5% value (NY’s 6.0% - Japan’s 0.5%) is not an accurate measurement Degree of leverage 1.5 to 1.0 is preferred Project will result in ratio of 4.0 to 1.0 Esposito’s Concerns WI

  8. Background of Brazil Political • Changes in government policy or the law • Changes in government spending Economic • Changes in inflation rate • Exchange rate exposure

  9. Brazilian Inflation Rates Mar ’90: Plano Collor WI Jul ‘94: Plano Real Jan ’89: Summer Plan ‘86: Plano Cruzado

  10. Economic Stabilization Plans Fernando Henrique Cardoso • Plano Real (Real Plan): Jul. 1994 – Jan. 1999 • Created social emergency fund • Established Unidad Real 1:1 US dollar • Opened economy to foreign trade and investment

  11. Brazilian GDP WI

  12. FHP Market Condition • US Shipments increased 66% • Light vehicle FHP motors 64% • Other uses: • Appliance • HVAC • Computer • Industrial Source: The Freedonia Group

  13. Market Condition • U.S. Market 1993-1998 • Percentage of Imported FHP Growth 78% • Mature Technology: Desire Low Cost Production WI Source: The Freedonia Group

  14. Market Condition North America: Demand increased 29% WI Central/S. America: Demand increased 28% Source: The Freedonia Group

  15. Market Condition • Growing South American Free Trade • Mercosur : Argentina, Brazil, Paraguay, Uraguay, Venezuela • Andean Community: Bolivia, Ecuador, Peru, Columbia • Initiated Process to form a Single Trading Bloc in 1999 WI

  16. Market Condition • Manufacturing in Brazil and sell to: • Brazilian domestic market • Neighboring market • Export to U.S. • Takes advantage of exchange rate fluctuation WI

  17. Brazilian Proposal Brazil is more attractive for Automotive FDI • Potentially growing domestic automobile market • 1:9 car per capita vs 1:2 car per capita in developed countries • Technically advanced workforce • Skilled in aerospace and computer

  18. Brazilian Economic Data Brazil is more attractive relative to other South American countries • Forecasted to be 6th largest economy by 2015 • Currently, largest economy in Latin America • GDP per capita in 2001 is $6,500 • U.S. GDP per capita is $35,505

  19. Relative GDP Growth Rate • Observations • Brazil’s growth rate is above South America’s average • Brazil’s growth rate is lower volatility

  20. Balance of Payment • Observations • Positive FDI Until 1999 • Year of devaluation • Short-term capital flight • Negative Trade Balance • Assumption • As the Real depreciated, FDI opportunities increased Chart – Source: http://www.latin-focus.com/latinfocus/countries/brazil/brabop.htm

  21. Costs do not change overtime Inflation rate will be stable between 7-9% Automakers will continue to produce more vehicles Lower tariffs will still continue to exist Assumptions WI

  22. Basic Issues Importance Low High Hedging Risks Political & Economic Risks Low WI Urgency Standardizing IRRs CBRC Methodology High

  23. Immediate Issues Importance Low High Hedging Risks Financing Low WI Urgency Political & Economic Risks Accept or Decline the Project High

  24. Cause and Effect Diagram Exchange Rate / IRR Determination Industry Viability Project Decision Equipment Financing Political & Economic Stability

  25. IRR for foreign projects > 9% Finance with lowest interest rate lowest foreign exchange risk Steady increasing cash flows Potential increase in market share Economy with increasing: Growth rate Domestic market Technically advanced work force Decision Making Criteria WI

  26. Alternative 1 • Accept the proposal with the assumption that all calculations are correct. • Accept the project assuming that it generates an IRR of 14.2% • Accept financing 80% of project with 5-year loan denominated in Yen at 0.5% WI

  27. Alternative 2 • Reject the proposal. • Reject the internal rate of return assumption WI

  28. Alternative 3 • Accept the proposal with revised calculations. • Apply inflation effect to IRR / NPV: • Without Inflation Effect: 14.2% IRR & $18.874 CF • With Inflation Effect: 10.51% IRR & $16,761 CF Assumed Inflation Rate Break Even Inflation Rate

  29. Alternative 4 • Seek another foreign supplier and financier. WI • Assumptions: • Inflation rates and interest rates will be around the current level for the next five years. • PPP and IFE are at work in these markets

  30. Financing Options WI

  31. Financing Options WI

  32. Conclusion • IRR:10.51% > 9% • Financing:Real > US Dollar > Yen • Choose Alternative #3: • Accept the proposal with revised calculations • Keep the current financing option (Japanese Yen at 0.5%) WI

  33. Recommendations • Look into future/forward contracts and see if it is cost effective: • $800K difference between Yen and U.S. Dollar • Look into other financing options in other countries. WI

  34. Thank you

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