TCAS Case Analysis

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TCAS Case Analysis

• Presented by
• Erica Judd
• Cornel Jurca
• Jiajia Ou
• Jerry Ramos
• Summer 2007
• International Finance 570
• Professor Dr. Joseph Greco

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TCAS Organizational Profile

• Transnational Corporate Advisory Services (TCAS)
  Inc
• Founded by three partners in 1982
• In 1988 Merged with Computer Software and
  Systems Company
• Primarily a financial training and consulting
  firm
• Key assets Knowledge and skills of the three
  founding partners in the field of finance,
  production and marketing
• Business lines include
• Purchases and sales of companies raising
  capital
• Business development financial consulting
• Management information systems

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Founders

• Gerhard Muck, Managing Partner, Specializes in
  strategic planning, acquisition of international
  investors and numerous MA activities.
• Robert Fotter, Partner,
• Expert consultant to mid-sized businesses in
  corporate financing and procuring holding
  capital.
• Bernd Liebmann, Partner,
• Wide range of international experience and
  industry knowledge from various countries.

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Financial Performance
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Financial Position
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Canadian Contract Bid Result

• Delivery Installation MIS LAN system
• Acceptance of Canadian contract bid on May 15,
  1995 C2,900,000

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Winning the Canadian Contract

• Single contract equivalent to almost 78 of its
  entire sales in 1994
• 10 of the price, C290,000 wired on May 16
• Performance Bond Required .75 of outstanding
  contract value
• 90 of the price, C2,610,000 to be received in
  90 days

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Canadas Macroeconomic
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C/US Exchange Rate Fluctuation
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Issues Identified

• Subject to transaction exposure due to
  fluctuation of Canadian Dollar exchange rate
  Spot Rate used in Bid
• Intends to go international, in the long run,
  operation exposure is identified as another issue

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Issues Identified

• Sales and net income decreased dramatically in
  1993 and 1994 Increasing net income and sales is
  top priority
• TCAS must decide how to finance the project given
  the large initial outlay expenditure and poor
  financial performance

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Need For 1 Million Financing

• .

Performance Bond
Labor
Need for 90 Day Finance
Installation
Purchase Materials
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Issues Identified
Importance Urgency Low High
Low Manage Economic exposure Finance the project
High Boost Sales and net income Hedge Transaction Exposure
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Alternatives
Alternative Explanation
Forward Contract Purchase forward contract at three-month forward rate of 1USC1.3653
Foreign Currency Loan Create a C loan for 90 days. Any gains and losses on receivables will be offset by equivalent losses and gains on the loan
Foreign Currency options Purchase put option at the rate of 1USC1.3888
Foreign Currency Futures Purchase August futures at the rate of 1USC1.3605
Pre-sale of Foreign Contract Sell the Canadian contract at a discount rate of 7.375
Tunnel Forwards Purchase a contractual agreement that sets a exchange range, the Canadian dollar put set at 1USC1.4019
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Selection Criteria
Criteria Explanation
Risk Mitigation Ability to mitigate transaction Exposure, measured by cash flow primary level criterion
Cost The cost of hedging, the lower, the better, secondary level criterion
Ease of Implementation Hedge implementation ease Rating from 1(Low)-5(High), third level criterion
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Evaluation of Alternatives Risk Mitigation
Alternative Cash Flow Ranking
Forward Contract (8,122.41) 3
Foreign Currency Loan 0 1
Foreign Currency options (39,789.53)
Foreign Currency Futures (1,519.69) 2
Pre-sale of Foreign Contract (141,597.396)
Tunnel Forwards (56,981.40)
However, the risk of mark to market during the
contract period makes the option risky
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Evaluation of Alternatives Risk Mitigation
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Evaluation of Alternatives Risk Mitigation
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Evaluation of Alternatives - Cost
Alternative Cost Ranking
Forward Contract 1 2
Foreign Currency Loan 17.375
Foreign Currency options 2.25 3
Foreign Currency Futures 50 Fee
Pre-sale of Foreign Contract 9.7
Tunnel Forwards 0 1
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Evaluation of Alternatives - Cost
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Evaluation of Alternatives Ease of
Implementation
Alternative Ease of Implementation
Forward Contract 5
Foreign Currency Loan 3
Foreign Currency options 4
Foreign Currency Futures 3
Pre-sale of Foreign Contract 5
Tunnel Forwards 5
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Evaluation of Alternatives - Summary
Alternative Cash Flow Cost Ease of Implementation
Forward Contract (8,122.41) 1 5
Foreign Currency Loan 0 17.375 3
Foreign Currency options (39,789.53) 2.25 4
Foreign Currency Futures (1,519.69) 50 Fee 3
Pre-sale of Foreign Contract (141,597.396) 9.7 5
Tunnel Forwards (56,981.40) 0 5
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Evaluation of Alternatives - Summary

• TCAS should have purchased a put-option at the
  time of their original bid on March 21, 1995
• TCAS was fortunate the Canadian dollar
  appreciated from 1.4096 to 1.3594
• TCAS immediate need is to mitigate their risk
  now that the contract has been awarded.

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Evaluation of Alternatives - Summary

• Forward contract forward currency loan Best
  options based on risk criterion
• Note High cost eliminates currency loan option
• Forward contract excels in ease of implementation
  criteria

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Selection of Optimal Alternative

• .

Easy to Implement
Low Cost
Selection of Forward Contract Hedging Instrument
Low Risk
Profit Margin Known
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Action Plan

• May 16, enter into a forward contract with Ms.
  Wrights bank
• May 16, secure third party performance bond
• Over next 90 days borrow 1 million to finance
  contractual obligation shortfall
• Fulfill the contract collect remaining balance

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Questions?