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FIN 570 Case Study

FIN 570 Case Study. October 6, 2008 Riley Drake Fazal Khan Matthew Hemenez. Introduction. Tranzonic Companies / Hospeco Specialty Company Crosswell International & Hector Lans Latin America and Brazil (Mathieux Bros.). Brazil Markets.

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FIN 570 Case Study

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  1. FIN 570Case Study October 6, 2008 Riley Drake Fazal Khan Matthew Hemenez

  2. Introduction • Tranzonic Companies / Hospeco Specialty Company • Crosswell International & Hector Lans • Latin America and Brazil (Mathieux Bros.)

  3. Brazil Markets • 1980’s - Johnson & Johnson introduce the Disposable Diaper • 1990’s - Increased competition, new entrants (25% Annual growth) • Segments • Foreign: Local production (40%) • Homegrown (30%) • Argentina: Mercusor (20%) • Foreign Imported (10%)

  4. Brazilian Economy (1995) • The Real Plan - 1994 • Currency Exchange Rates • Crz2,750/US$ -> R$1.00/US$ • R$0.93/US$ (1995) • Inflation Rates – 50% -> 2% per month • Savings/Loans – 3-4% & 8-9% per month Stable

  5. Historical Exchange Rate Value of $R to the US Dollar has been fairly stable since Jan-94

  6. Entry in Brazilian Market • Establish contract with distributor for “Precious Line of Diapers”- Material Hospitalar • Determine method of operations and associated risks • Determine target market segment • Establish price of product to consumer

  7. Considerations • Crosswell to ship FOB • Payment to be made in US$ to Crosswell • Cash in Advance • Confirmed Documentary Letter of Credit • Establish Price • Crosswell R$92.21 • Hospitalar R$83.00

  8. Issues

  9. Cause and Effect Causes Examples • 2% Import Duty • 25% Merchant Marine Renovation Fee • 2% Customs brokerage fee • 15% Industrial product tax Effect Financing costs too high Differing interest rates Differing inflation rates Price of product is too high for Brazil market. Taxes and tariffs Exchange rate risks

  10. Alternatives • Do nothing to reduce price • All parties reduce margins • Eliminate or reduce distributor financing costs • Capitalize on interest rates

  11. Decision Criteria • Select the alternative that: • Ensures a <$83 per case price • Ensures that margin objectives are met at each channel tier. • Sufficiently addresses exchange rate risk. • All three criteria must be met

  12. Alternatives ORIGINAL

  13. Special Conditions

  14. IF Crosswell opened a Brazilian acct Interest earned in 6 months: 16.8% Interest earned would offset exchange rate risk Interest Income Possibility

  15. Interest Offset 16.8% margin for exchange rate risk via interest offset Interest offset for exchange rate risk (-16.8%)

  16. Proposed Solution Crosswell will reduce its price by 3.75% to achieve $83 retail price per unit Crosswell retains 16.8% margin against exchange rate risk via interest offset Under nominal conditions, Crosswell will earn 62% more profit

  17. Proposed Solution

  18. Risks Brazilian interest rates could drop substantially, & will likely decline steadily as $R value proves to be stable Crosswell to watch rates closely (at least weekly) May convert Brazilian deposit amount to $US at any time Set up ExIm Bank for possible future L/C financing for Brazilian trade Propose alternative to Crosswell board: 90-day L/C to Brazilian distributor, and distributor earn interest & absorb exchange rate risk

  19. Implementation Plan

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