Great Eastern Toys (B) As part of its growth strategy, a new product has been designed and a study carried out by a consultant to estimate the market potential and the investment required to put it into production. The analysis calls for an estimation of the relevant cash flows from the project raising questions such as measuring opportunity costs, evaluation of sunk costs and joint costs, the impact of the new product eroding sales from existing products - typical problems arising when making capital investments. Since the investment project extends over several years, a DCF analysis is necessary. Discussion needs a full class session.
The case raises many of the typical issues facing exporters, importers, and others active in international trade. These include: 1. Should companies hedge currency or other financial risks? Should companies speculate - that is, try to make money from taking currency positions? 2. How does one measure what is at risk? 3. If there really is a risk of loss from fluctuating currencies, what can be done about it? 4. What instruments are appropriate to manage this risk? 5. How do the foreign exchange markets function, and what is their relation to the financial markets? 6. Can currency movements be forecast? If so, how does one go about it? There is adequate information in the case study to explore all of these questions. However, the instructor will need to explain a number of technical issues such as how forwards and options are used in hedging, how they are priced, and what risks do they create. Two full class sessions can be devoted to discussion.
- Financial analysis
- Working capital management
- Investment appraisal
- Valuation of a company
- Currency risk management
