What finance methods might jasmine adopt to satisfy

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Reference no: EM133715762

Question: Jasmine is a large company which manufactures children's toys. It is a private UK limited company with a diversified shareholder base. The company has its headquarters in London, and as part of a group structure, wholly owns subsidiary companies in the UK, China and the US.

A new chief executive (CEO), Mr. Harold Jordan, was recently appointed by the Board to replace the retiring CEO, Mr. James Hannah, who led the company for the past twenty-five years. During this time, Jasmine has produced an extensive range of products within the children's toy industry. Many of the toys manufactured are protected through patents and trademarks held by the company and the manufacturing business has a small innovation team which is tasked with improving or developing products for markets. Over the last few years, however, the company's profitability has declined through a combination of factors including increasing competition and rising costs. Mr. Jordan has been tasked with reinvigorating the company, and providing growth in the business lines, ultimately impacting on profitability and the overall value of the company.

After undertaking a full review of the company's operations, Mr. Jordan has announced a five-year strategic plan which he calls 'Vision 2028'. Mr. Jordan has suggested that the company needs to restructure, reduce staffing, and crucially, focus on entering new markets in Europe. As part of Vision 2028, Mr. Jordan plans to introduce new environmentally friendly technology to manufacture drones and robots for the toy market; to develop a series of family orientated toys to encourage family bonding; and produce a new range of educational toys. He also has plans to improve the profitability of radio-controlled boats which have been a relatively new venture for the business. He has yet to discuss these plans with the Board, and although he knows he has been hired to provide a new direction for the company, he recognises that Vision 2028 will raise several concerns with his senior colleagues.

a.In the context of 'Vision 2028', the new management is considering building a new factory in South Korea. The Korean subsidiary will require an initial investment of 200,000m South Korean Won (KRW). Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea. Appendix below offers information about the borrowing costs in different currencies and an estimation of the future value of FX. Advise which is the best way to finance the Korean factory.

b.Mr. Jordan considers moving the Chinese factory to South Korea. Assess the risk exposure related to this relocation of production.

c.The research department of a large financial institution provided inflation expectations for the next five years. According to the forecasts, UK will have 1.75% more inflation than France and 3.5% higher inflation than South Korea. On the basis of this new evidence, would you reconsider your proposal with regard to financing the Korean factory?

Initial investment (KRW)

200,000

Interest rate in UK (5-year loan)

0.09

Interest rate in South Korea (5-year loan)

0.15

Interest rate in France (5-year loan)

0.12

Spot exchange rate: KRW per GBP

2,000.00

Expected appreciation of GBP in relation to KRW

4% per annum

Forecasted exchange rate: EUR per GBP

1.18

Expected appreciation of GBP in relation to EUR

3% per annum

Jasmine has well established export markets but if the Board approves Vision 2028, it will begin to enter new markets abroad.

d.If Jasmine wants to borrow long-term funds to support its new foreign operations, what options does it have available to it?

e.What finance methods might Jasmine adopt to satisfy itself that it will be paid for shipping goods to new importers?

Reference no: EM133715762

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