Advanced Corporate Finance

Question :

In this fictitious case, you are a financial analyst on the Automotive Strategy team of Luxury Motors, a global manufacturer of premium automotive vehicles and products. Your responsibilities include evaluating the financial and strategic implications of corporate investment decisions.

Attached are relevant e-mails and data you have received from the Economics, Manufacturing, Marketing, Product Development, and Tax Counsel teams.

1. Review the attached material and prepare a one-page executive summary that addresses the alternative strategies outlined in the series of e-mail communications.

2. Please include the following items in your summary:

a. Financial analyses for the alternative provided, as directed by Jess Wanderlust in her e-mail. Figures/tables are recommended.

b. Your recommendation if the alternative should be chosen

c. Additional information that would assist you in your evaluation of the alternative.

Answer :

Financial Analysis:

In response to your relevant data, it is anticipated that the differences in the exchange value are leading the company Luxury Motors in a profitable position by reducing the cost. The high value of the US dollar when converted into Rica currency has affectedly decreased the cost of operation for the manufacturing company. Additionally, the maximum reduction is earned in the way of duty and tax savings (Ghiyasi, 2018). A minor change by 11%, and the variable cost is reduced by 100% for Rica manufacturing outlet only. However, if the US-based manufacturing unit is converted in Reca Current, then it will make losses. Therefore, carrying on production in Reca units will be beneficial for the Luxury Motor even if the value of Reca currency is decreeing compared to the US dollars.

Recommendation of Alternate Approach

Based on the reported contents, it is clearly shown that the company can carry out its alternative in Rica. However, the company should not operate in its current manufacturing unit in the US. The investment of $1 billion will be more if converted into Reca units. By manufacturing in Reca will reduce the cost by 50% however, the company can secure the deficits of exchange values by hedging (Lewin and Cachanosky, 2018).

Additional Information:

To safeguard the company from material exchange values, the company may go for hedging by forwarding contracts. This increases the overall profitability, and financial decisions as this will lead to an increase in the stability and sustainability of Luxury Motors (Froot, 2019).

References:

Froot, K.A., 2019. Currency Hedging Over Long Horizons. Annals of Economics & Finance, 20(1).

Ghiyasi, M., 2018. Performance assessment and capital budgeting based on performance. Benchmarking: An International Journal.

Lewin, P. and Cachanosky, N., 2018. Value and capital: Austrian capital theory, retrospect and prospect. The Review of Austrian Economics, 31(1), pp.1-26.