Discuss the consultant’s view and the possibilities for the financing of this expansion..
Requirements: Read the scenario below. Starting on 5th February, and for the following four weeks, questions for your group to consider and research will be released each Friday in the assessment tab on BB.
Each week your group should research answers to the questions, and put them together in a portfolio. Once you have answered all the questions, you should produce a 1,500-word report summarizing the position of the business, based on your research for the questions. In addition, each member of the group should submit a 500 word individual piece giving conclusions and recommendations for the future of the business.
The scenario:
You are the board of directors of a manufacturing company, Green Battery Technology Systems (GBTS Plc), based in the United Kingdom. Your company manufactures batteries used in the manufacture of various types of electric cars. You supply a number of major car producers worldwide, exporting to Germany, China, and the United States. In January 2015 (a year ago), GBTS set up a joint venture with Beijing Battery Power Technology (BBPT), a relatively small battery producer in China, to develop a new lighter and faster charging lithium battery. The research and development has been done in a small factory near Beijing, with staff supplied equally from GBTS and BBPT. The new battery is now ready for production, and could be produced in either China or the UK, or both, for sale worldwide. Marketing plans and production facilities are under discussion.
You have also recently been contacted by a Russian government trade official, who has suggested that tax breaks and other incentives could be available for manufacture of electric cars in Russia, and has offered to broker talks with a Russian car manufacturer which might be interested in developing this market. You could either enter into a supplier agreement with the Russian manufacturer, or a joint venture to manufacture batteries actually in Russia, in which case bigger incentives could be available.
Question:
1. Explain the conditions that would cause your business to be adversely affected by exchange rate movements.
2. Research the relative levels of interest rates in Russia, China and the UK. What do you findings imply about the forward premium or discount of the Rouble and the Yuan?
3. What does this suggest about your business using the forward or future contracts to hedge any periodic profits in Roubles or yuan that must be converted into pounds? Explain whether and under what circumstances you would hedge your exposure to these currencies.
4. You are considering financing the expansion in Russia by investing a small amount of UK pound equity into this project, and financing the remainder with debt. You would prefer to avoid using Russian debt to finance your expansion in Russia because the interest rates are high. A consultant suggest that you seek one or more investors in Russia who would be willing to take an equity position in your business. You would provide them with periodic dividends and they would be partial owners of your company. The consultant suggests that this strategy circumvents the high cost of capital in Russia because it uses equity financing instead of debt financing. Discuss the consultant’s view and the possibilities for the financing of this expansion.
Discuss the consultant’s view and the possibilities for the financing of this expansion.
