Reference no: EM132964112

East Coast Yachts Goes International

• Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company's yachts in Europe. J arek J achowicz, the dealer, wants to add East Coast Yachts to his current retail line. J arek has told Larissa that he feels the retail sales will be approximately €8 million per month. All sales will be made in euros, and J arek will retain 5 percent of the retail sales as commission, which will be paid in euros.
• Because the yachts will be customized to order, the ?rst sales will take place in one month. J arek will pay East Coast Yachts for the order 90 days after it is ?lled. This payment schedule will continue for the length of the contract between the two companies. Larissa is con?dent the company can handle the extra volume with its existing facilities, but she is unsure about any potential ?nancial risks of selling yachts in Europe. In her discussion with J arek, she found that the current exchange rate is $1.34/€.
• At this exchange rate, the company would spend 80 percent of the sales income on production costs. This number does not re?ect the sales commission to be paid to J arek. Larissa has decided to ask Dan Ervin, the company's ?nancial analyst, to prepare an analysis of the proposed international sales.

Speci?cally, she asks Dan to answer the following questions:

Problem 1: What are the pros and cons of the international sales plan? What additional risks will the company face?

Problem 2: What will happen to the company's profits of the dollar strengthens? What if the dollar weakens?

Problem 3: Ignoring taxes, what are East Coast Yacht's projected gains or losses from this proposed arrangements at the current exchange rate of $1.34/€? What will happen to profits if the exchange rate changes to $1.25/€? At what exchange rate will the company break even?

Problem 4: How can the company hedge its exchange rate risk? What are the implications for this approach?

Problem 5: Taking all factors into account, should the company pursue international sales further? Why or why not?