fin 570 case study october 6, 2008 riley drake fazal khan matthew hemenez
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FIN 570Case Study
October 6, 2008Riley DrakeFazal KhanMatthew Hemenez
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Introduction Tranzonic Companies / Hospeco
Specialty Company
Crosswell International & Hector Lans
Latin America and Brazil (Mathieux Bros.)
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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%)
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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
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Historical Exchange Rate
Value of $R to the US Dollar has been fairly stable since Jan-94
Value of One Brazilian $R
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
Jul-
94
Aug
-94
Sep
-94
Oct
-94
No
v-9
4
De
c-9
4
Jan
-95
Feb
-95
Ma
r-95
Apr
-95
Ma
y-9
5
Jun
-95
Jul-
95
Aug
-95
$US
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Entry in Brazilian Market Establish contract with distributor for
“Precious Line of Diapers”- Material Hospitalar
Determine method of operations and associated risks
Determine target market segment
Establish price of product to consumer
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Considerations
Crosswell to ship FOB
Payment to be made in US$ to Crosswell− Cash in Advance− Confirmed
Documentary Letter of Credit
Establish Price − Crosswell R$92.21− Hospitalar R$83.00
US CompanyCROSSWELL
US Sales RepsMATHIEUX
BROS.
BrazilianDistributorMATERIAL
HOSPITLAR
BrazilianRetail
Outlets
Exchange Rate Risk
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Issues
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Cause and Effect
Causes
Financing costs too high
Exchange rate risks
Differing interest ratesDiffering inflation rates
Taxes and tariffs
Effect
Price ofproduct is too high for Brazilmarket.
Examples 2% Import Duty 25% Merchant Marine Renovation Fee 2% Customs brokerage fee 15% Industrial product tax
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Alternatives Do nothing to reduce price
All parties reduce margins
Eliminate or reduce distributor financing costs
Capitalize on interest rates
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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
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US CompanyCROSSWELL
US Sales RepsMATHIEUX
BROS.
BrazilianDistributorMATERIAL
HOSPITLAR
BrazilianRetail
Outlets
Exchange Rate Risk
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SCENARIO ADD'L 4% DISC. No Financing CostCROSSWELLQuoted price 32.57 32.57 32.57Discount 0.00 0.00% 1.30 4.00% 0.00 0.00%price to Mathieux Bros 32.57 $US 31.27 $US 32.57 $US
MATHIEUX BROS.cost/ case 32.57 31.27 32.57Mathiex commissions 1.50 4.61% 0.94 3.00% 1.50 4.61%other costs 5.18 5.18 5.18price to Distributor 39.25 $US 37.39 $US 39.25 $US
EXCHANGE RATE 0.935 $R/$US 0.935 $R/$US 0.935 $R/$US
MATERIAL HOSPITALAR (dist)cost/ case 36.70 $R 34.96 $R 36.70 $Rimporting costs 4.29 11.7% 4.09 11.7% 4.29 11.7%cost of financing inventory 2.57 7.00% 2.45 7.00% 0.00 0.00%distributor margin 8.71 20.0% 6.64 16.0% 8.20 20.0%price to retailer 52.27 $R 48.13 $R 49.19 $R
RETAILERcost/ case 52.27 48.13 49.19taxes 18.66 35.7% 17.18 35.7% 17.56 35.7%retailer costs & markup 21.28 40.7% 17.33 36.0% 20.02 40.7%price to consumer 92.21 $R 82.63 $R 86.77 $R
Target Price 83.00 $R 83.00 $R 83.00 $RPrice to consumer - + - +Margins + - + +Exchange Rate Risk - - - + ?
ORIGINAL
US CompanyCROSSWELL
US Sales RepsMATHIEUX
BROS.
BrazilianDistributorMATERIAL
HOSPITLAR
BrazilianRetail
Outlets
Exchange Rate Risk
AlternativesORIGINAL ADD'L 4% DISC. No Financing Cost PROPOSED
CROSSWELLQuoted price 32.57 32.57 32.57 32.57Discount 0.00 0.00% 1.30 4.00% 0.00 0.00% 1.22 3.75%price to Mathieux Bros 32.57 $US 31.27 $US 32.57 $US 31.35 $US
MATHIEUX BROS.cost/ case 32.57 31.27 32.57 31.35Mathiex commissions 1.50 4.61% 0.94 3.00% 1.50 4.61% 1.02 3.25%other costs 5.18 5.18 5.18 5.18price to Distributor 39.25 $US 37.39 $US 39.25 $US 37.55 $US
EXCHANGE RATE 0.935 $R/$US 0.935 $R/$US 0.935 $R/$US 0.935 $R/$US
MATERIAL HOSPITALAR (dist)cost/ case 36.70 $R 34.96 $R 36.70 $R 35.11 $Rimporting costs 4.29 11.7% 4.09 11.7% 4.29 11.7% 4.11 11.7%cost of financing inventory 2.57 7.00% 2.45 7.00% 0.00 0.00% 0.00 0.00%distributor margin 8.71 20.0% 6.64 16.0% 8.20 20.0% 7.84 20.0%price to retailer 52.27 $R 48.13 $R 49.19 $R 47.05 $R
RETAILERcost/ case 52.27 48.13 49.19 47.05taxes 18.66 35.7% 17.18 35.7% 17.56 35.7% 16.80 35.7%retailer costs & markup 21.28 40.7% 17.33 36.0% 20.02 40.7% 19.16 40.7%price to consumer 92.21 $R 82.63 $R 86.77 $R 83.01 $R
Target Price 83.00 $R 83.00 $R 83.00 $R 83.00 $RPrice to consumer - + - +Margins + - + +Exchange Rate Risk - - - +
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Monthly Interest Rates in Brazil(www.latin-focus.com)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95
Borrow ing Rate 8.4% 10.6% 7.8% 12.6% 14.5% 18.0% 11.2% 8.3%
Deposit Rate 3.8% 4.8% 3.5% 5.7% 6.5% 8.1% 5.0% 3.5%
US Prime Rate 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7%
Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95
Special Conditions
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IF Crosswell opened a Brazilian acct
Interest earned in 6 months: 16.8%
Interest earned would offset exchange rate risk
Interest Income Possibility
Brazilian Deposit Account $R month1 month2 month3 month4 month5 month6beginning balance - - 101,750 105,311 108,997 112,812 collections deposited 100,000 interest earned 3.50% - 1,750 3,561 3,686 3,815 3,948 converted to $US (100,000) ending balance - 101,750 105,311 108,997 112,812 16,760 profit from deposit 16.8%
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Value of One Brazilian $R
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
Jul-
94
Aug
-94
Sep
-94
Oct
-94
No
v-9
4
De
c-9
4
Jan
-95
Feb
-95
Ma
r-9
5
Apr
-95
Ma
y-9
5
Jun
-95
Jul-
95
Aug
-95
$US
Interest Offset
16.8% margin for exchange rate risk via interest offset
Interest offset for exchange rate risk (-16.8%)
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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
CROSSWELL FINANCIAL PERFORMANCE SCENARIOSworst poor nominal good best
value of $R incr (decr) -10% -5% 0% 5% 10%price to distributor ($US) 31.35 31.35 31.35 31.35 31.35normal gross profit (@ 20%) 6.51 6.51 6.51 6.51 6.513.75% discount (1.22) (1.22) (1.22) (1.22) (1.22)subtotal 5.29 5.29 5.29 5.29 5.29interest earned (16.8%) 5.27 5.27 5.27 5.27 5.27gain (loss) from chg in ExR (3.14) (1.57) 0.00 1.57 3.14gross profit realized 7.42 8.99 10.56 12.12 13.69
normal gross profit 6.51 6.51 6.51 6.51 6.51% better (worse) 14% 38% 62% 86% 110%
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ORIGINAL ADD'L 4% DISC. No Financing Cost PROPOSEDCROSSWELLQuoted price 32.57 32.57 32.57 32.57Discount 0.00 0.00% 1.30 4.00% 0.00 0.00% 1.22 3.75%price to Mathieux Bros 32.57 $US 31.27 $US 32.57 $US 31.35 $US
MATHIEUX BROS.cost/ case 32.57 31.27 32.57 31.35Mathiex commissions 1.50 4.61% 0.94 3.00% 1.50 4.61% 1.02 3.25%other costs 5.18 5.18 5.18 5.18price to Distributor 39.25 $US 37.39 $US 39.25 $US 37.55 $US
EXCHANGE RATE 0.935 $R/$US 0.935 $R/$US 0.935 $R/$US 0.935 $R/$US
MATERIAL HOSPITALAR (dist)cost/ case 36.70 $R 34.96 $R 36.70 $R 35.11 $Rimporting costs 4.29 11.7% 4.09 11.7% 4.29 11.7% 4.11 11.7%cost of financing inventory 2.57 7.00% 2.45 7.00% 0.00 0.00% 0.00 0.00%distributor margin 8.71 20.0% 6.64 16.0% 8.20 20.0% 7.84 20.0%price to retailer 52.27 $R 48.13 $R 49.19 $R 47.05 $R
RETAILERcost/ case 52.27 48.13 49.19 47.05taxes 18.66 35.7% 17.18 35.7% 17.56 35.7% 16.80 35.7%retailer costs & markup 21.28 40.7% 17.33 36.0% 20.02 40.7% 19.16 40.7%price to consumer 92.21 $R 82.63 $R 86.77 $R 83.01 $R
Target Price 83.00 $R 83.00 $R 83.00 $R 83.00 $RPrice to consumer - + - +Margins + - + +Exchange Rate Risk - - - +
Proposed Solution
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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
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Implementation Plan1-Aug Hospitalar requests a price from Crosswell2-Aug Crosswell proposes Brazilian account idea to the board of directors5-Aug Crosswell's board of directors approves the Brazilian account idea6-Aug Crosswell establishes Brazilian bank account8-Aug Crosswell responds, via fax, with an FOB price Miami of 29.31 $R ($US
price discounted 3.75 and converted to $R at ExR of .935), in exchange for confirmed 45-day L/C in $R
11-Aug Hospitalar agrees to terms and faxes purchase order to Crosswell12-Aug Crosswell faxes a pro forma invoice to importer agreeing to price and
terms13-Aug Hospitalar's bank issues L/C and sends advice to Crosswell's Brazilian
bank that a L/C has been opened in its behalf, guaranteeing payment in $R within 45 days upon presentation of specified documents.
14-Aug Crosswell's Brazilian bank confirms the L/C.15-Aug Crosswell turns goods over to freight forwarder for shipment and
consigns goods to order of shipper.16-Aug Shipping company issues bill of lading.
8-Sep Hospitalar receives goods12-Sep Hospitalar sells goods to retailer and is paid cash by retailer.27-Sep L/C matures and payment transacts to Crosswell's Brazilian account
After Crosswell monitors its Brazilian account and interest rates no less than weekly