A truck producer must decide whether to take a chance on the sale of 120 trucks to a private company in Costa Rica. If a bid is offered, a final result must be drawn on whether to protect against the credit, exchange rate, and sovereign risks.
1. Why are Wiesinger and Burgenlander at odds over the Costa Rican bid? What is the source of their conflict?
2. How would you alleviate the conflict between Wiesinger and Burgenlander?
3. How attractive would the Costa Rican contract be to HKK assuming: a) no change in the $/As exchange rate, b) expected exchange rate changes given the long-term interest rates in Exhibit 2. (For simplicity, assume no OKB financing at this stage.)Assume a required return on levered equity of 20 percent in Austrian Shillings. Note that Burgenlander states (at the bottom ofpage 5) the cost of producing the vehicles is As200 million. (This will help you develop your expected future cash flows andthe value of the deal to HKK.
4. Repeat question 3 under the following scenarios: c) a dollar depreciation of 20 percent below the expectation in part 3-b, and d)a dollar appreciation of 25 percent above the expectation in part 3-b.
5. How much OKB financing could potentially be made available in connection with the Costa Rican contract?
6. How much more attractive might the contract be because of the OKB financing? For simplicity, assume that OKB financingprovides As60 million in non-amortized debt at an annual pre-tax interest savings of 5 percent. Assume a 50 percent corporatetax rate.
7. Would you cover the currency exposure assuming that the contract is denominated in U.S. dollars? Why or why not?
8. In summary, what would you recommend that Wiesinger do about the Costa Rican bid? If you recommend a hedge of thecurrency exposure, state how you’d hedge; that is, the amount and the type(s) of contract(s) with which you’d hedge.