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FIN 570Case Study
October 6, 2008Riley DrakeFazal KhanMatthew Hemenez
Introduction Tranzonic Companies / Hospeco
Specialty Company
Crosswell International & Hector Lans
Latin America and Brazil (Mathieux Bros.)
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%)
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
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
$US
Entry in Brazilian Market Establish contract with distributor for
“Precious Line of Diapers”- Material Hospitalar
Determine method of operations and associated risks
Determine target market segment
Establish price of product to consumer
Considerations
Crosswell to ship FOB
Payment to be made in US$ 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
Issues
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
Alternatives Do nothing to reduce price
All parties reduce margins
Eliminate or reduce distributor financing costs
Capitalize on interest rates
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
US CompanyCROSSWELL
US Sales RepsMATHIEUX
BROS.
BrazilianDistributorMATERIAL
HOSPITLAR
BrazilianRetail
Outlets
Exchange Rate Risk
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 - - - +
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
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%
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%)
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%
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
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
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