Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 21, Problem 1M
S&S Air Goes International
Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with a light aircraft dealer in Monaco about selling the company’s planes in Europe. Jarek Jachowicz, the dealer, wants to add S&S Air to his current retail line. Jarek has told Mark and Todd that he feels the retail sales will be approximately €5.3 million per month. All sales will be made in euros, and Jarek will retain 5 percent of retail sales as a commission, which will be paid in euros. Because the planes will be customized to order, the first sales will take place in one month. Jarek will pay S&S Air for the order 90 days after it is filled. This payment schedule will continue for the length of the contract between the two companies.
Mark and Todd are confident the company can handle the extra volume with its existing facilities, but they are unsure about the potential financial risks of selling their planes in Europe. In their discussion with Jarek, they found that the current exchange rate is $1.37/€. At the current exchange rate, the company would spend 80 percent of the sales on production costs. This number does not reflect the sales commission paid to Jarek.
Mark and Todd have decided to ask Chris Guthrie, the company’s financial analyst, to prepare an analysis of the proposed international sales. Specifically, they ask Chris to answer the following questions.
1. What are the pros and cons of the international sales? What additional risks will the company face?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with an aircraft dealer in Europe about selling the company's Eagle airplane. The Eagle sells for $98,000 and has a variable cost of $81,000 per airplane. Amalie Diefenbaker, the dealer, wants to add the Eagle to her current retail line. Amalie has told Mark and Todd that she feels she will be able to sell 15 airplanes per month in Europe. All sales will be made in euros, and Amalie will pay the compnay 78,400 euros for each plane. Amalie proposes that she order 15 aircraft today for the first month's sales. She will pay for all 15 aircraft in 90 days. This order and payment schedule will continue each month.
Mark and Todd are confident they can handle the extra volumen with their existing facilities, but they are unsure about the potential financial risks of selling their aircraft in Europe. In their discussion with Amalie, they found out that the current exchange rate is $1.25/euro. This means that they…
Domestic
SCENARIOYou are the purchasing agent for THE BRICK. You have acquired a great deal from a US supplier who is going out of business. "WOODEN KITCHEN TABLE SETS" are available at 50% of the regular price. But the goods must be imported before the end of February 2023You contact the supplier and he informs you that the price of the SETS were $1800 and now are selling for $900.00 US each and you require 20000 sets Number of units: 20,000Cost per unit: $900.00 USD Exchange rate: $1 USD = $1.46 CAD GST Rate: standard rate Certificate of origin not available (1) Complete the financial calculations VFCC, VFD, CD, VFT, GST and TDTP for this shipment. All calculation must be shown
Chapter 21 Solutions
Fundamentals of Corporate Finance
Ch. 21.1 - What are the differences between a Eurobond and a...Ch. 21.1 - Prob. 21.1BCQCh. 21.2 - Prob. 21.2ACQCh. 21.2 - Prob. 21.2BCQCh. 21.2 - Prob. 21.2CCQCh. 21.3 - Prob. 21.3ACQCh. 21.3 - Prob. 21.3BCQCh. 21.4 - Prob. 21.4ACQCh. 21.4 - Prob. 21.4BCQCh. 21.5 - What financial complications arise in...
Ch. 21.5 - Prob. 21.5BCQCh. 21.6 - Prob. 21.6ACQCh. 21.6 - How can a firm hedge short-run exchange rate risk?...Ch. 21.7 - Prob. 21.7ACQCh. 21.7 - Prob. 21.7BCQCh. 21 - Prob. 21.1CTFCh. 21 - Prob. 1CRCTCh. 21 - Prob. 2CRCTCh. 21 - Prob. 3CRCTCh. 21 - Prob. 4CRCTCh. 21 - Prob. 5CRCTCh. 21 - Prob. 6CRCTCh. 21 - Prob. 7CRCTCh. 21 - Prob. 8CRCTCh. 21 - Prob. 9CRCTCh. 21 - Prob. 10CRCTCh. 21 - Prob. 1QPCh. 21 - Prob. 2QPCh. 21 - Prob. 3QPCh. 21 - Using Spot and Forward Exchange Rates [LO1]...Ch. 21 - Cross-Rates and Arbitrage [LO1] Suppose the...Ch. 21 - Interest Rate Parity [LO2] Use Figure 21.1 to...Ch. 21 - Interest Rates and Arbitrage [LO2] The treasurer...Ch. 21 - Prob. 8QPCh. 21 - Prob. 9QPCh. 21 - Prob. 10QPCh. 21 - Prob. 11QPCh. 21 - Prob. 12QPCh. 21 - Prob. 13QPCh. 21 - Capital Budgeting [LO2] Lakonishok Equipment has...Ch. 21 - Capital Budgeting [LO2] You are evaluating a...Ch. 21 - Prob. 16QPCh. 21 - Prob. 17QPCh. 21 - Using the Exact International Fisher Effect [LO2]...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - SS Air Goes International Mark Sexton and Todd...Ch. 21 - Prob. 5M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Global Reach, Inc., is considering opening a new warehouse to serve the Southwest region. Darnell Moore, controller for Global Reach, has been reading about the advantages of foreign trade zones. He wonders if locating in one would be of benefit to his company, which imports about 90 percent of its merchandise (e.g., chess sets from the Philippines, jewelry from Thailand, pottery from Mexico, etc.). Darnell estimates that the new warehouse will store imported merchandise costing about 16.78 million per year. Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 8 percent of the total. The average tariff rate on these imports is 5.5 percent. Required: 1. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Why? (Round your answer to the nearest dollar.) 2. Suppose that, on average, the merchandise stays in a Global Reach warehouse for nine months before shipment to retailers. Carrying cost for Global Reach is 6 percent per year. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be? (Round your answers to the nearest dollar.) 3. Suppose that the shifting economic situation leads to a new tariff rate of 13 percent, and a new carrying cost of 6.5 percent per year. To combat these increases, Global Reach has instituted a total quality program emphasizing reducing shrinkage. The new shrinkage rate is 7 percent. Given this new information, if Global Reach locates the warehouse in a foreign trade zone, how much will be saved in carrying costs? What will the total tariff-related savings be? (Round your answers to the nearest dollar.)arrow_forwardYou SUckaroo CC. a ho(keyequipment business, estimates that it will sell 3 400 pairs of shin pads per year from a distributor in Spain. Each pair costs R 195.00 to purchase and R18.00 in freight charges. The company borrows funds at an interest rate of 9% per annum to finance inventories. Stickaroo ccs purchasing agent has calculated that it costs R 472.00 to place an order for each pair of shin pads and that the holding cost is R 6.00 for each pair. Calculate the eoq.arrow_forwardA luggage buyer plans a European buying trip to purchase $250,000 (cost value) of assorted travel packs. On the first stop in London, orders are placed for $92,000 (at cost) for an assortment of leather luggage, which will be priced at $180,000 retail. If the average markup is targeted at 52.0%, what markup percentage should be taken on the balance of the European orders?arrow_forward
- Current Attempt in Progress Marigold Furniture sell high end designer furniture. Most of its inventory is sourced from Europe. The company purchases its inventory FOB shipping point and must pay its European suppliers in advance. Once payment is received the inventory is shipped. On average it takes the inventory 8 weeks to arrive. The company's average inventory turnover is 6 times. Most sales are to corporate clients with an average collection period of 65 days. What is Marigold's cash conversion cycle? (Use 365 days for calculation.) O 65 days O 121 days O 56 days Ⓒ182 daysarrow_forwardJaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the U.S. for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/E. Jaguar has committed to keeping the U.S. price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate? (A) 20.0% 15.3% 12.2% D 7.2%arrow_forwardLand Rover has full manufacturing costs of their Evoque crossover of £32,500. They sell the Evoque crossover in the UK with a 15% profit margin. Today the spot exchange rate is $1.3456/£ and Land Rover has committed to keeping the U.S. price based on the $1.3456/£ cross-rate next six months. If the cross-rate changes to $1.4321/£, how much gain or loss will the company experience per every car sale in the U.S. in British pound terms? £2,402.60 £1,963.02 £2,257.48 £3,232.94arrow_forward
- In addition to its Australian business, Big Red Bicycle is considering manufacturing anew range of cheaper bicycles in Indonesia. The following information is available:● The Indonesian plant has capacity to manufacture 8,000 units.● Big Red Bicycle’s strategic goal is to generate a pretax profit of $1,000,000 forthe next financial year for Indonesian operations.● Clients will pay a maximum of $500 per bicycle● Possibility exists for move to Indian plant with capacity for 10,000 units.● Market for bicycles is growing rapidly and BRB will be able to sell allunitsproduced.● Limited ability to renegotiate costs with suppliers.● Pricing and cost information is as follows. Bicycle price per unit $500 (excl. GST)Current variable costs perunit $250 Fixed costs $1,280,000 Complete the following. 1. On your response document, work out:a. how many units at current variable cost would need to be produced toachieve profit target (show calculations)b. what the variable costs per unit would need to…arrow_forwardThe selling price of imported olive oil is $20 per case. Your cost is 15 Euros per case, and the exchange rate is currently 1.25, so it takes 1.25 Euros to buy $1. Your argest customer has ordered 15,000 cases of olive oil. How much is the pretax profit for this transaction? a. $120,000 b. $100,000 c. $90,000 d. $80,000 e. $60,000arrow_forwardCitron buys a counterfeit production line at a price of €200,000. However, the cash flow that will result from the three-year production of the product depends on the conditions of demand in the plastics industry. Specifically, 3 versions of demand are formed, the high, the normal and the low, with equalprobabilities for any eventuality. Demand is expressed as follows (in euro): Demand / Year 1st 2nd 3rd High 100.000€ 120.000€ 130.000€ Normal 75.000€ 80.000€ 95.000€ Low 65.000€ 70.000€ 82.000€ a) How will this investment be valued if the equipment has a residual value of € 20,000 at the end of the 3rd year, the market rate for such activities is set at 8% and the risk-free rate at 5%?arrow_forward
- International energy drink giant Energica America's regional sales manager Will Smith investigate the plans for the Middle East and plans to launch in Azerbaijan in 2021. The market price of the Company's plant in America is determined to be $ 5 million. It causes the company to need a capital of $ 20 million in 2021 to shift the investment to Azerbaijan and to establish a new bottling factory and distribution channel. While the fixed expenses required for production, distribution and marketing as of 2021 are $ 3 million per year, 50 million liters of energy drink will be produced in the country at the end of each year. Variable costs arising from production and distribution will be 12 Cent per liter. According to the policy pursued, the expected minimum return rate of the company is accepted as 6%. The income from sales is expected to be 35 cents per liter. Bottling factories are expected to serve almost forever, so all unit costs and sales revenues are expected to remain constant…arrow_forwardF2arrow_forward.noitudifaib Isimbnid eri to abitan9106 2169 Of Ixen ert to A vitose ni oni lliw ito ten other video Task 1: tam A U.S.-based company imports furniture from Germany. In accordance with the contract, the U.S. company will have to pay €8,000,000 for a shipment of furniture in 30 days. Information about the spot and forward rates is given below: Current spot rate EUR/USD 0.800 EUR/USD 0.799 30-day forward rate 1. Describe the risk that the U.S. company is exposed to. (1 USD costs 0.8 EUR) AlesT it muminim en 169 Isait ati to 19hsup dhuot erit ni mit is not sure 29mu6 1900sm erT .000,000, Are ai etsmitee mumixem erit bris 000,000,r3 ai eunevet 29lsa to stsmitee .betudinteib ylmotinu ens elsa erlt terit 19hsup rihuot erlt not euneven 2elsa to eulsv betoqxe erit animated 2. Explain how the U.S. company can hedge the risk by using the forward contract. q ert briarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License