Great Eastern Toys (C)

Published 12 Jan 2000
Reference 4876
Region Asia
Summary

Great Eastern Toys (C) A major concern of the family owners was whether to try to sell their company. The “C” case gives students the opportunity to consider many approaches to valuing a firm: comparative valuation (P/E ratios, price-to-book ratios, price to cash flow ratios, and price to sales ratios) or a DCF valuation. Both approaches present considerable analytical problems. A major weakness of the comparative approach is to find a similar company. Hong Kong, a relatively small stock market, has no firm in the toy business to use as a guide. Other publically traded firms of similar size, markets, and product-lines are found in the Japanese and the American stock markets. But given the differences among the companies and also the markets, how useful are these? There is enough data in the case to allow the student to make a DCF valuation, although projection of the cash flows is subject to a wide range of possibilities. An estimate of a reasonable discount rate also is required, raising questions (assuming use of the CAPM) such as what should be the firm’s beta, the risk-free rate, and the equity market premium. Students will need at least two hours of preparation plus a full class session.

Teaching objectives

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.

Keywords
  • Financial analysis
  • Working capital management
  • Investment appraisal
  • Valuation of a company
  • Currency risk management