Hintz-Kessels-Kohl A.G. (HKK), a manufacturer of two-wheeled vehicles, trucks, buses, farm machinery and ball bearings was the third largest manufacturing and leading automobile firm of Austrias in 1978. With the company's rapid growth since mid-1960s resulted in company's focus to selected export markets and by 1975 the exports accounted for over half of HKK's sales. The concern for HKK was a recent bid that was being prepared by its Commercial Vehicle Division for its Costa Rican Customer in which it would sell 180 four-wheel-drive trucks; however, the payment would be received in a USD and over a period of five years. The deal was very lucrative on face value generating around ATS 300 million in revenue in which ATS 200 million worth of operating cost was involved. However, the problem was the fact as the payments would be received in USD, and despite the fact that the USD has shown an appreciating trend, it was expected that the value would decline in the future which was making the Costa Rican deal less attractive. Also, political and economic inconsistent situations in Costa Rica posed a significant credit risk in the bid and HKK also had a limited experience of working in that part of the world.
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.