Fin 570: International FinanceFin 570: International FinanceDr. Greco, Summer 2009Dr. Greco, Summer 2009
Rezene A. • Calvin C. • Edward M. • Vince T. • Tiffany T. • Calvin C. • Edward M. • Vince T. • Tiffany T.
Wiley InternationalWiley International
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• Manufacturer of motors and componentsManufacturer of motors and components
• ““Wiley Inc.” to “Wiley International”Wiley Inc.” to “Wiley International”
• Best managers assigned to foreign Best managers assigned to foreign divisionsdivisions
– Regional managers propose to HQRegional managers propose to HQ
– Made separately due to difficulties in risk Made separately due to difficulties in risk differencesdifferences
About Wiley InternationalAbout Wiley International
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Richard Esposito’s new policyRichard 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
About Wiley InternationalAbout Wiley International
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Purpose: Purpose: Increase production capacity
• Finance a new manufacturing plantFinance a new manufacturing plant
– Increase market share and profit marginIncrease market share and profit margin
• Gain competitive advantageGain competitive advantage
– Foreign firms who face trade barriersForeign firms who face trade barriers
– Small domestic firms with a history of Small domestic firms with a history of quality problemsquality problems
The Brazilian ProposalThe Brazilian Proposal
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Purpose of RequestPurpose of Request
• Quality of workforce and regulationsQuality of workforce and regulations
• Take advantage of incentive programs Take advantage of incentive programs from Brazilian governmentfrom Brazilian government
• Division requests – at R$2.8/US$1:Division requests – at R$2.8/US$1:
The Brazilian ProposalThe Brazilian Proposal
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Financial JustificationFinancial Justification
• R$6m training expensed for taxesR$6m training expensed for taxes
• R$30m will be using 5-year straight-line R$30m will be using 5-year straight-line depreciationdepreciation
ProjectProject FinancingFinancing
•Purchase equipment from Japan
•Financing 80% of project with 5-year loan denominated in Yen at 0.5%
The Brazilian ProposalThe Brazilian Proposal
• Project’s IRR is calculated using CFs Project’s IRR is calculated using CFs denominated in Real while U.S. hurdle denominated in Real while U.S. hurdle rate is 9%rate is 9%
• 5.5% value (NY’s 6.0% - Japan’s 0.5%) is 5.5% value (NY’s 6.0% - Japan’s 0.5%) is not an accurate measurementnot an accurate measurement
• Degree of leverageDegree of leverage
– 1.5 to 1.0 is preferred1.5 to 1.0 is preferred
– Project will result in ratio of 4.0 to 1.0Project will result in ratio of 4.0 to 1.0
Esposito’s ConcernsEsposito’s Concerns
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PoliticalPolitical
•Changes in government policy or the law
•Changes in government spending
EconomicEconomic
•Changes in inflation rate
•Exchange rate exposure
Background of BrazilBackground of Brazil
WI‘86: Plano Cruzado
Jan ’89: Summer Plan
Mar ’90: Plano Collor
Jul ‘94: Plano Real
Brazilian Inflation RatesBrazilian Inflation Rates
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Fernando Henrique Cardoso Fernando Henrique Cardoso
• Plano Real (Real Plan): Jul. 1994 – Jan. 1999
1. Created social emergency fund
2. Established Unidad Real 1:1 US dollar
3. Opened economy to foreign trade and investment
Economic Stabilization PlansEconomic Stabilization Plans
Brazilian GDPBrazilian GDP
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FHP Market ConditionFHP Market Condition
• US Shipments increased 66%
• Light vehicle FHP motors 64%
• Other uses:
– Appliance
– HVAC
– Computer
– Industrial
Source: The Freedonia Group
Market ConditionMarket Condition
U.S. Market 1993-1998U.S. Market 1993-1998
• Percentage of Imported FHP Growth 78%
• Mature Technology: Desire Low Cost Production
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Source: The Freedonia Group
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Market ConditionMarket Condition
North America:Demand increased 29%
Central/S. America:Demand increased 28%
Source: The Freedonia Group
Growing South American Free Growing South American Free TradeTrade
• Mercosur : Argentina, Brazil, Paraguay, Uraguay, Venezuela
• Andean Community: Bolivia, Ecuador, Peru, Columbia
• Initiated Process to form a Single Trading Bloc in 1999
Market ConditionMarket Condition
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Manufacturing in Brazil and sell to:Manufacturing in Brazil and sell to:
• Brazilian domestic market
• Neighboring market
• Export to U.S.
• Takes advantage of exchange rate fluctuation
Market ConditionMarket Condition
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Brazil is more attractive for Brazil is more attractive for Automotive FDIAutomotive 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
Brazilian ProposalBrazilian Proposal
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Brazil is more attractive relative to Brazil is more attractive relative to other South American countriesother 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
Brazilian Economic DataBrazilian Economic Data
ObservationsObservations
• Brazil’s growth rate is above South America’s average
• Brazil’s growth rate is lower volatility
Relative GDP Growth RateRelative GDP Growth Rate
ObservationsObservations
• Positive FDI Until 1999– Year of devaluation– Short-term capital
flight
• Negative Trade Balance
AssumptionAssumption
• As the Real depreciated, FDI opportunities increased
Balance of PaymentBalance of Payment
Chart – Source: http://www.latin-focus.com/latinfocus/countries/brazil/brabop.htm
•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
AssumptionsAssumptions
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Basic IssuesBasic Issues
Hedging Risks
LowLow HighHigh
Lo
wL
ow
Hig
hH
igh
Political & Economic
Risks
Standardizing IRRs
CBRC Methodolog
y
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ImportanceImportance
Urg
en
cy
Urg
en
cy
Immediate IssuesImmediate Issues
Hedging Risks
LowLow HighHigh
Lo
wL
ow
ImportanceImportance
Urg
en
cy
Urg
en
cy
Hig
hH
igh
Financing
Political & Economic
Risks
Accept or Decline the
Project
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Cause and Effect DiagramCause and Effect Diagram
Political & Economic Stability
Exchange Rate / IRR
Determination
Equipment Financing
Industry Viability
ProjectDecision
• 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 CriteriaDecision Making Criteria
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Alternative 1Alternative 1
Accept the proposal with the Accept the proposal with the assumption that all calculations assumption that all calculations are correct. 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
Alternative 2Alternative 2
Reject the proposal.Reject the proposal.
• Reject the internal rate of return assumption
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Alternative 3Alternative 3
Accept the proposal with revised Accept the proposal with revised calculations.calculations.
Break Even Inflation Rate
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
Alternative 4Alternative 4
Seek another foreign supplier and Seek another foreign supplier and financier.financier.
Assumptions: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
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Financing OptionsFinancing Options
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Financing OptionsFinancing Options
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ConclusionConclusion
IRR:IRR: 10.51% > 9%
Financing:Financing: Real > US Dollar > Yen
Choose Alternative #3:Choose Alternative #3:
• Accept the proposal with revised calculations
• Keep the current financing option (Japanese Yen at 0.5%)
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RecommendationsRecommendations
• 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.
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Thank youThank you
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