Luxury Automotive Supply into the Californian market

Thèmes abordés

Luxury Automotive Supply - Breakeven analysis - Expected return - WACC - Capital Asset Pricing Model - Beta - Payment terms - Raising money - Bonds - Stock - Risk Management

Résumé du document

This report consists in the case study of Luxury Automotive Supply tackling the Californian market.
It deals with five questions:
Company's Breakeven analysis, expected return on the firm's common stock calculation, WACC calculation, Capital Asset Pricing Model, Choice for payment terms, Choice regarding fund raising: bonds or stock? and Risk Management: how to hedge international risk?

Extraits

[...] Consequently, β will be influenced by the same elements that will influence the stock market. As a conclusion, we can say that beta varies according to numerous environmental data on the market. Those external data concern political, environmental, strategic, technological, economical or legal issues. In function with those issues, a market varies, and investments become more or less risky, with corresponding rewards willing to be more or less interesting. As far as the automotive industry is concerned, numerous data can be taken into account when listing all possible conditions we would expect to influence the beta. [...]

[...] In order to cope with international risks, Luxury Automotive Supply has to resort to hedging. By definition, hedging is practice of purchasing and holding securities specifically to reduce portfolio risk. These securities are intended to move in a different direction than the remainder of the portfolio - for example, appreciating when other investments decline” (definition from the website Investopedia, available at http://www.investopedia.com/ articles/optioninvestor/07/affordable-hedging.asp and accessed on January 28, 2011). There are many specific financial instruments to hedge international risk regarding currency, including insurance policies, forward contracts (agreement that specifies an amount of currency to be delivered, at an exchange rate decided on the date of contract), swaps, options (contract that gives the owner the right to take or deliver a specified amount of currency, at an exchange rate decided at the date of purchase), many types of over-the-counter and derivative products, futures contracts (agreement to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed today, known as the futures price) and currency Exchange Traded Funds. [...]

[...] The business model therefore has to be adapted for an international expansion, in order to diversify the portfolio regarding both tapped markets and launched products. For instance, in countries where the buying power is low, the company should choose to launch basic, cheap cars; in countries where the economic situation is better (for instance in Brazil), the company should launch up market cars. The strategy should not be the same in all tackled countries: a subsidiary could be set up in order to cope with exchange rates risks; production could be relocated in a country where labor costs are lower; suppliers have to be diversified Bibliography Seminar materials Corporate Finance By Pr. [...]

[...] For instance, if credit rating agencies (like Standard & Poor's and Moody's) upgrade or downgrade the credit rating of the issuer, the value of the bond will vary: a downgrade will cause the market price of the bond to fall, and conversely. Even if such a risk does not affect the bond's interest payments, it puts at risk the market price, which affects mutual funds holding these bonds, and holders of individual bonds who may have to sell them Question 5 Five years later, all the stores are doing extremely well and the firm decides to expand into several Latin America countries. Currently, there is no system in place for managing currency risk. [...]

[...] shares the market value of the firm's debt the overall capital = CS + PS + D Rcs, the return on common stock Rps, the cost of preferred shares Rd, the cost of the debt = 200,000 = 100,000 = 200,000 = 500,000 = = = and Tc, the corporate tax Consequently: = The company's after-tax, weighted average cost of capital amounts to The Capital Asset Pricing Model The CAPM model was first introduced by Jack Treynor in the early sixties. It refers to the fact that investments in the financial market are risky. This risk concerns both specific stock in which the investor places his money (called unique risk) and the overall market risk all stocks are subjected to. [...]