Finance

The establishment of a business venture especially during this time when the world economy is just recovering from the recent recession has become a challenge for individuals as well as companies. One of the challenges facing the organizations is lack of adequate financial services and lack of security to access loan from the financial institutions. Due to the high amount of capital needed in the ship industry especially the initial costs of acquiring the vessels and the formal procedures of purchasing, companies and individuals have turned to banks in order to borrow loans (Martin,2009). This paper seeks to give an advice to a ship owner on the various methods of raising the finance required to purchase a Panamax dry bulk carriers. In order to achieve this objective, the paper will discuss the merits and demerits of each of the financing method.

Leasing
This type of financing involves two parties the lessor and the lessee. Under the leasing agreement, the lessor gives the right to the lessee to use a specific asset for a prescribed period against the payment of the lease rental. Being one of the simplest method of acquiring an asset based on the few formal transaction involved, the ship owner can opt to use this method in order to acquire the two ships. Another aspect which makes this method appropriate is the flexible repayment period. The ship owner who is the lessee in this case, can decide to pay for the lease rental on yearly, semiannually, quarterly or monthly basis. The lease contract is for a specific period for example 7 years, 10 years or 25 years (Gove et al, 1961). Depending with the period which the ship owner agrees with the lessor he will acquire the right to operate the vessel as long as he continues paying the lease rental as per the contract. Another advantage of leasing is that there is higher leverage for the lessee. This implies that the right to use the vessel is obtained by the lessee immediately the agreement is finalized. Even though the lessor retains the legal ownership of the vessels, it is advantageous to the ship owner in the sense that his business operations will continue to operate and the revenue generated will cater for the purchase cost of the ships. Similarly, the ship owner will benefit from the depreciation and the capital allowances which reduce the tax payable by the owner. As a result the ship owner will benefit from higher profits.

However, this method has some disadvantages. First, it is expensive in the short-term. It is prudent to note that in most cases the prices of vessels acquired through leasing are higher as compared to other methods of purchasing. In this regard, the ship owner will pay large amount of money in the form of instalments(Martin,2009). This makes this method costly for the ship owner which implies a large capital outlay during the initial stages of operations. Nevertheless, the ship owner can use this method based on the many advantages associated with leasing.

Bank loans
Commercial banks are other crucial financial institutions which can give loan to the ship owner in order to acquire the ships. As indicated earlier, the challenges faced by the companies or individual ship owners is due to the hesitant of some financial institution to give loans needed for purchasing second hand vessels such as the panamax dry bulk carriers. In this regard, the ship owner should seek loan from the commercial banks in order to purchase the vessels. The first advantage of borrowing from the commercial banks is that they are flexible and quickly react to the customers requirements and problems. This implies that the delays related with loan acquisition are eliminated which makes the ship owner to start his operations in a timely manner. Secondly, commercial banks offer personalized services. This means that more attention will be given to the ship owner regarding his preferred repayment period and the amount of the loan needed. Thirdly, commercial banks offer their loan at a lower cost as compared to other financial institutions. This will enable the ship owner to pay little amount of money as the interest on the loan, which is a fundamental aspect which will lead to the expansion of his business operations. In addition to the financial assistance that commercial banks offer they are at the forefront in giving advisory services to their customers. This aspect will be imperative for the ship owner which will help him to effectively utilize the loan and avoid diverting the loan to other personal use however much they will be urgent.

Lack of adequate collateral is one of the factors which can hinder the ship owner from accessing the loans from the commercial bank. In this regard, it is prudent that the ship owner considers seeking for finance from other sources such as the ship mortgage bonds.

Ship mortgage
This source of finance makes it possible to acquire finance by mortgaging the ships owned. Two parties are involved in this source of finance these are the mortgagee and the mortgagor. In this case the mortgagee is the finance company offering the loan while the mortgagor is the ship owner. The loans obtained by the mortgagor are to be repaid through installments over a specific period of time. One of the advantages of using this is that it is a long term source of finance used to acquire assets, buildings and ships. Secondly, the interest on mortgage is an allowable expense for tax purposes. Just like in the case of leasing as a source of finance, the mortgagor remains with the vessel which makes it a flexible source of finance. However, since the ship owner may not have more ships to mortgage, it may not be possible to utilize this source of finance.

Mezzanine finance
The mezzanine finance is another source through which the ship owner can get the funds.  Also referred to as a junior debt, Mezzanine finance will give the ship owner an opportunity to bridge the gap which exists between the equity and the bank debt. One of the major advantages of this source of finance is that the investor will allocate fewer funds in order to acquire the loan. In addition, the ship owner will have more power over the vessel just like in the leasing. Similarly, due to the few legal arrangement involved between the loan seeker and the financial, this source of finance is not restrictive implying that the ship owner will be in a good position to acquire the funds needed to purchase the two ships. However, the high yield debt is an obstacle which may deter the ship owner from using the mezzanine finance.

Financial leasing
Financial lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to a lessee. One of the aspects which make it appropriate for the ship owner to emulate this kind of source of finance is that it is non-cancellable and long term. This implies that there is no situation which may hinder the ship owner from owing the ships. Secondly, the lease paid by the lessee is allowable expenses for tax purposes. Thirdly, the ship owner can benefit from this method in that he will acquire the ships without incurring capital expenditure. Fourthly, if the ships are for commercial purposes the ship owner can cancel the contract if the business is not profitable. Due to the regular changes of level of technology in the shipping industry, this method of financing is also advantageous in that it is suitable for the assets which become obsolete very fast (John and Murphy, 1999).
The first major disadvantage of this source of finance is that the rental charges paid by the lessee may be too high. This would increase the business expenses leading to decreased profits. Secondly, the terms and conditions of financial leasing may not be favorable to the lessee and he may not be able to utilize the vessels conveniently. It is also a risky source of finance in that if the ship owner decides to purchase one ship first, the lessor may decide not to renew the contract. This implies that the ship owner may fail to acquire the two ships contrary to his intention.

Hire purchase
This is another method which can be applied by the ship owner to purchase the ships. Due to lack of adequate liquid cash by most of the companies, hire purchase has become the alternative option which has enabled organization acquire the assets which seem to be expensive. This method entails paying for the vessels out of income rather than capital. The use of the vessel will be gained on the on payment of the first instalment. Hire purchase has become increasingly vital in the contemporary business arena especially during acquisition of capital goods. The first advantage of this mode of financing is that the ships will be gained on payment of the first instalment. This means that the ship owner can use the vessels to generate profits which can be used to repay the succeeding instalments. Secondly, the instalments paid are predetermined. This avoids the seller from making any changes on the cost of the vessel. Thirdly, there is no collateral required in order to acquire the asset, as a result the large amount of capital is not tied up. Nevertheless, hire purchase may not be appropriate based on its three disadvantages. First, the instalments charged are high. This increases the entire buying price of the ships.

Secondly, due to unavoidable circumstances the ship owner may not be able to pay the instalments on time as a result the ships may be re-possessed by the seller. Thirdly, the ownership of the ships will remain with the hire purchase company. Based on this the ship owner may not effectively utilize the vessels (Thomas and Robert, 1982).

Differences of methods of funding for the ship owner, a well established ship owner with a current fleet of over 20 similar vessels and a small independent owner with only two such vessels in the present climate

Based on the above discussion on the various sources of funds available for the ship owner, a well established ship owner with 20 similar vessels will utilize different sources of funds. First, the well established ship owner might not access loans due to lack of trust by the financial institutions. As a result, he might opt to use other sources of funds such as the IPO (Initial Public Offer).However, this can only happen only if he owns a company (Joseph, 2000). In addition, the individual may come together with other companies in order to be more qualified for higher loans. By maintaining proper books of accounts and maintaining high credit worthiness, such an individual may utilize the services of companies such as Standard and Poor in order to undertake external credit worthiness rating which is required by most of the financial institutions when giving loans (Martin, 2009).

In the same way, a small independent ship owner with only two vessels will utilize different methods of finance. This is based on the fact that banks and other financial institutions are not flexible with small ship owners in the current climate. An independent ship owner may therefore seek for private debt from insurance companies or private equity which is commonly provided by hedge funds.

Basing on the above analyses it is precise that the large amount of capital required to purchase the ships can be addressed by use of various sources of finance. The most important thing is for the individuals and the companies to undertake an intensive study on the most profitable and economically viable source which will guarantee future positive returns. According to my perspective, I would advice the ship owner to go for commercial bank loans due to the flexibility associated with this source of finance.

Q.1     The main roles and responsibilities of the Assistant Chief financial Officer include managing the administration of financial aid through enforcing financial procedures, documentation and keeping records tracking, planning, following up and scheduling for interviews. This officer is also responsible for motivating and managing the staff towards ensuring that the available finances are utilized properly and that the employees are well remunerated. The A.C.F.O is also responsible for the management of accounts receivable activities and the termination of non-properly working or delinquent accounts analyzing the output and giving all information regarding the student and agency finance, as well as providing technical leadership assistance to teams and department leaders. The A.C.F.O is also responsible for ensuring that regulatory compliance is maintained, maintaining customer satisfaction through making improvements and developments based on customer feedback systems (Bruce  Marcucci, 2003, 10).

Q.2     The office of budget and management works closely with the higher education board, the institutional personnel management department and the American Association of University professors (Levine, 2000, pg 23).

Q.3 the main sources of funding for higher education institutions include local property taxes which are levied on properties like halls and furniture, the student fees paid in as tuition charges and other payments. The other main sources of finances include the general sources of funds like institution based businesses and federal funding from the state among other minor sources of financing (Bruce  Marcucci, 2003, 10).
One of the restrictions placed on the finances available at the endowment account is the investment of the moneys into a savings account or low-risk business to allow the amount to grow for future long or short term usage (Bruce  Marcucci, 2003, 10).

Q.4 The budget process for a higher education institution involves the following phases the preliminary budget planning, departmental planning, director or dean level planning, vice presidential level planning then the planning at the institutional level. The other phases of the process involve the general budget guideline planning, the official approval practice, scenario funding and then the last stage of beginning and ending with the goals and objectives of the budget process. The participants of the planning process include the president and the vice-president faculty and staff heads the deans or directors and other institutional advisory groups. The other departments contribute through assessment of the set goals and objectives towards establishing necessary adjustments and cost estimation towards the overall process. The budget finalizing step involves request based description of the different plans with reference to purpose, program, cost and benefits. The budget approval process involves the forwarding of the budget plan to the board of regents who after approval forward it to the higher education state regents. After the state regents approve the budget, the draft is forwarded to the state finance office for the final approval (Rhoades, 1998, pg 34).

Q.5 The processes involved in budget accountability at the different levels of management with regard to overruns and deficiencies include the creation of an account as a review of the resource use and performance with regard to the initial expectations and plans. Sanctions are also put into action in the cases of unacceptable variations from prospects. Budget reforms also forms another process that can be used for correcting this case (Rewick, 2001).

Q.6 the penalties for any individual charged over budget mismanagement may involve the offenders being required to pay a fine a case under which the fine to be paid is subject to the amount misappropriated. The other penalty may involve the case where, the offender is suspended from their official duties for a specified length of time with or without pay and in other cases the individual may be relieved of their duties (Park, 2007).

Q.7. These institutions may become victims of finance runs a case under which the investors contributing to the finances accounted for, in the budget withdraw their support. In such a case, these institutions can look for alternative sources of funding. Speculative crashes crisis may also take place where the prices of products held by the institutions fall requiring the institution to release them at low returns. In such a case these institutions may choose to hold the assets till the price rises to avoid the loss. International financial crisis which take place in the case the currency of the home country hosting the institution devalues its currency due to a speculative attack makes the institution not capable of paying for their sovereign debts. In such a case the institution may choose to postpone the payment of the debts till the home currency regains value (Rewick, 2001).

Third party credit card processors refer to the company that is supposed to accept the payments of the credit cards on your behalf. They are also responsible for processing the payments that are paid by the customers. Finally, you as the retailer are paid minus a fee charged as the commission by the third party merchant. It is not necessary to pay for high cost fee of processing, monthly fee or the minimum fee of the transaction. The customers may not loose money on this because they only pay a small percentage of the sales made. (Marc and Rysman, 2006).

Interchange fee refers to the charges made by the banks that issue the credit cards and the debit cards. These fees are meant to minimize the risks that the customer may not pay or to cater for the cost of processing the transaction. These charges are paid by the merchants who have agreed to use the cards to make their payments. The fee charged comprises of a fixed per every transaction plus a small percentage of the amount which is charged. These charges may be a big expense to the merchant who decide to use them to make the payments for the goods and the services. This is because every transaction consists of a chain of four parties which includes the merchant who is the owner of the card, the bank which the merchant belongs to, the bank that issued the card as well as the card user. Interchange fees are taken as a function that comprises of several functions including the quantity of the transactions which are made by the merchant, the procedure used, whether the card was swiped or entered manually and the type of the card that is used during the transaction. The increased use of the credit cards combined by the costs paid by the merchants has brought about battles between the two parties.

To compensate for the losses made during the credit card transaction, the merchant may decide to buy his or her own credit card processing machine that would enable him to cut on the middle men during the stages of setting up your businesses to ensure that your business accepts the credit card processing. The merchant may also put up a very big banner on the front of the store indicating that the business accepts the credit cards payments. This may bring up new customers who may compensate for the charges that are used in setting up the credit processing machine. The merchant may also decide to raise some prices of some of the lower cost items which would enable the business to compensate for the credit card processing. In addition, the merchant has to teach and require all his employees to check always the credit card signature of the customer alongside the customer identification and the expiry date for the credit card in order to reduce the chances of having fraud credit cards. (Marc and Rysman, 2006).

Apart from the increased profits for the owner, the increased sales have many advantages for the business. First there is increased sales because the credit card orders are large than any other type of payment. The credit cards would also cheaper to process. Therefore they make work easy as a result of the large amounts of the work that is ordered it would be cheaper to process the credit cards. Increased sales also leads to more security of the merchant as they compensate for any charges that may be incurred during the transaction in the credit cards. Increased sales also make the company to increase the options to the customers because the business may opt tom use both the cash and even the credit cards. Increased Sales - credit card orders are generally larger in nature than other forms of payment. (Marc and Rysman, 2006).

From a personal opinion, it is reasonable for credit card companies to charge a business a processing fee in addition to charging consumers interest on each purchase. This is because the merchants have to charge the merchants in so that they may receive the payments from the merchants. For some small businesses or the businesses that do not make a lot of sales, the merchants may decide to charge a small fee when using the credit card, or else, the merchant may be forced to set a minimum fee in order to avoid the fee. For example, they may decide that any purchase below 5 has a fee that is charged and all purchases that are above 5 are not charged anything. (Marc and Rysman, 2006)

Question I
An agency problem does exist between Shareholders, who are the actual owners of any organization, and its agents or the management of the organization. Both the parties involved, the Shareholders and the management have different perspectives of creating wealth and distributing the same, and it is important to understand their respective perspectives to understand d the perennial problem between them. The agency problem is even more evident when the management is in the hands of a select few, who have large control over management, but have lesser control on the overall value of the organization. This creates a case of mistrust among the shareholders or the principals.
The perspectives of all shareholders are not alike, but the majority of shareholders are the large investors who invest with the sole purpose of capital maximization, as they are less bothered by divided paid out by the company, on which tax is payable at a higher rate than on long term capital gains. On the contrary, smaller investors prefer to have cash in hand based on the bird in hand theory of dividend. They prefer profit to be the motive of the management, and the same profit instead of being reinvested should be distributed.
When dividend is reinvested, wealth maximization occurs, which should be the motive of the management of any organization as abundant wealth can help a company to invest into newer ventures when the need arises.
Modigliani  Miller have propounded two theories on dividend payout and capital structure, which have the following assumptions.
There are no corporate taxes
No brokerage charges exists
Investors can borrow at the same rate as corporations
Information available to investors is the same as the information available to the management.
The dividend indifference theory proposed by Miller- Modigliani , believes in one implication that whatever be the dividend policy of the management, there would be no change on the market value of the organization or its cost of capital, in the longer run. They argue that dividend policy is a passive residual, which is purely dependent on an organizations need for investment funds.
They believe that an optimal dividend payout theory does not exist and management need not agonize themselves to either distribute profits or to retain them. The MM theory claims that if a shareholder is in need of cash, he would sell his existing stock, rather than depend on dividend payout, which is not under his control. Similarly, if he has a surplus of funds he would reinvest them into the company, hence maximizing his wealth. They go on with the argument that the value of a firm depends only on the earning power of the organization and its business risk. Hence, what matters according to Miller- Modigliani is the income earned by assets of the organization and not on how the income is divided between dividends and retained earnings.
Similarly, Miller- Modigliani state in another theory, that the capital structure of an organization has no effect on its value. As given in the above assumptions, individual investors can borrow as freely and at the same rates, as organizations can. As a result, the investor would prefer to invest into a less levered firm, by borrowing from a financial institution. The eventual returns to either of investing in a levered or an unlevered firm would be the same. Therefore, the price of the unlevered firm would be the same as the price of the levered firm, minus the money borrowed by the individual, to invest in the unlevered firm.
However, the Miller- Modigliani is unrealistic with most of its assumptions and does not help the management in solving the agency problem. The management though acting as an agent of the shareholders in many ways works against the motives of the principals, i.e. the shareholders. A company that reduces the amount of dividend per year, can significantly lose the number of investors, and hence companies make extra efforts to keep a standard level of dividend instead of increasing or decreasing constantly. By increasing the dividend payout, the company would attract more smaller investors and lose out on the larger investors. And, by decreasing dividend payout, the company would lose the faith of smaller investors.
Similarly, when the company is highly leveraged, it increases risk that might occur due to high interest payments, causing a severe cash crunch, leading ultimately to bankruptcy. Hence, shareholders prefer a lower levered firm, while the management prefers higher leverage so that wealth maximization can occur.

Question II
 A business has continuous requirements for funds, and several factors need to be kept in mind while choosing the right source of financing
The amount of funds required
The quickness of the funds required
Cheapest options available
The amount of risk involved in the purpose of borrowing
The length of time of the fund requirement, short term or long term
There are several sources of funds that a company can employ to gain funds, which include Ordinary shares, Preference shares, Bonds and banks. The merits of the sources are discussed below
Ordinary shares Shares holders are the last paid after interests on bonds and loans, and preference shareholders. Hence, the company with low cash or profit can choose this method of raising funds. Also, raising share capital for listed companies is relatively easy.
Preference Shares These shareholders would only get a fixed amount of dividend per annum, when compared to equity shareholders. Also, profits need not be shared when the company is in losses.
Bonds Bonds are issued to individual investors for a fixed annual interest. The company has only to pay the annual interest and has no capital repayments due within the term of the bonds.
Bank loans Banks loans are easy to procure for large organizations and generally have the lowest interest rate, when compared to bonds or preference capital.

 A Bond holder is secured about his investment, when compared to equity shareholders or preference shareholders. Bond holders are assured of income even when the company has profits or losses, and hence the company faces more risk to pay interests under whatever circumstances. On the contrary, shareholders might receive income only when the company has profits.
When the company is under the process of bankruptcy, even then the bond holders are the most preferred and are assured of receiving their investments, as they are treated equal to creditors. The company has to payout to bond holders under whatever circumstances, causing a great risk to the organization.
Solution
Facts of the Problem
Amount of capital to be raised by rights issue  GBP 40 million
Current market price of share  GBP 4.23
Offer ratio for rights issue is, 1 share at GBP 3.2 for each 3 shares owned
Required to find expected value of the shares after rights issue the Ex right price
Solution
Ex rights price  (Total Value of original shares  value of rights share) total number of shares after rights issue.
Assume that a customer holds 300 shares of the company at GBP 4.23
His Value of shares  4.23300  GBP1269
When he accepts the rights issue, he would gain 100 share, which implies that the value of rights gained  GBP 3.2  100 shares  GBP 320
Ex rights price  (1269320) 400
         GBP 3.9725
 The pecking order theory by Gordon Donaldson suggests that companies prefer financing their investments in a particular manner, which is
Internal financing or retained earnings
Bank loans or any other pure debts
Preferred stock
Hybrid securities that include convertible bonds
Equity
One of the strongest factors that causes such an attitude from the management, is the ease or convenience of borrowing. The management of an organization find it difficult to approach a third party for financing and prefer to use their own accumulated resources first. Equity is chosen last as it is the most difficult process to acquire funds, especially if an organization needs to do so for the first time. As a result, of the pecking order of financing, the capital structure of an organization would be filled with more debt and less equity, as equity becomes the last choice of raising funds.
Question III
Solution

ParticularsYearCash Flow
( 000s)PV Factor
(11)Discounted CashflowInitial investment0(30000)1(30000)117800.9116198223800.8119278Net Present Value of investment 5476
Workings
Expected cash flow of investment for Year 1 
((Cash flow of probability 1 Probability 1)  (Cash flow of probability 2  Probability 2)) Total Probability
 (15000.6)  (22000.4)1   17800
Expected cash flow of investment for Year 2 
((Cash flow of probability 1 Probability 1)  (Cash flow of probability 2  Probability 2)) Total Probability
 (22000.7)  (28000.3)1   23800
Calculation of Standard deviation of NPV
  of year 1  prob of case1(cash flow of case1- Mean of cash flows)2  prob of case 2(cash flow of case 2- Mean of cash flows)212
 .6(15000-18500)2.4(22000-18500)212
 (.612250000)(.4 12250000)12
 7350000490000012
  of year 1  3500
  of year 2  prob of case1(cash flow of case1- Mean of cash flows)2  prob of case 2(cash flow of case 2- Mean of cash flows)212
 .7(22000-25000)2.3(28000-25000)212
 (.7900000)(.3 900000)12
 900000 12
  of year 2  3000
  of Project      (SD of year 1(1disc factor))  ((SD of year 2(1disc factor)2)
         (35001.11)  (3000(1.11)2)
         2702.7 2434.9   5137.6    
c. Calculate probability of possibility of NPV being negative
Mean NPV  - (Initial Investment)  (mean Cash flow for 1st Year)1.11  (mean cash flow for II year)(1.11)2
            -30000  (185001.11)  (250001.2321)
             -30000  16667  20291
Mean NPV           6958
Standardized difference      (Expected NPV  Mean NPV) Standard Deviation of NPV
                 (0-6958)5137.6
                 1.35
Probability of NPV (0)      .885 ( According to probability distribution tables)
Hence, there is 88.5 chance of the NPV being lower than zero for the given problem
D.      FINDINGS
    There are a few interesting facts that can be found from the above workings. Firstly, the NPV is  5476, while the standard deviation is about  5137.6. Hence, one thing that can be ascertained clearly is that there level of deviation is quite high when compared to the actual NPV. This indicates high volatility in the cash flow stream of the organization.
Another scary piece of information for the management is the fact that there is a .885 chance of the NPV being lesser than zero or negative. Hence, Cloaca PLC has a mere 11.5 of getting a positive NPV. The investment has a positive NPV, but minor deviations in the actual cash flow can affect the viability of the investment. The organization should identify means to increase its cash inflows or decrease the cash outflow, to make the investment not just viable, but more safe.

Question IV
Solution
Required Rate of Return on Equity  Ke
Ke       Risk free rate of return  (expected return- Risk free rate)Beta of portfolio
         .04  (.1-.04)1.1
         .04  0.066
         .106 or 10.6
Required Rate of Return on Preferred Stock   Kp
Kp      Annual dividend on preferred stock Sale proceeds or Market price of preferred share
     (7.5  100 share) 108
     7.5108
     0.06944  6.94 returns on preferred stock
Required Rate of Return on Debt  Kd
Kd      k(1-t) , where k is the actual cost of debt, and t is the effective corporation tax rate
     5(1-.3)  5.7
    3.5  is the cost of debt
Weighted average cost of capital of Riquiqui PLC
Ko (Ke  (ET))  (Kp  (PT)  Kd  (DT), where
E  Equity Capital, T  total of debt and capital, P  preferred capital, D Debt
Ko      (10.6(4080))  (6.94 (1080))  ( 3.5  (3080))
     (10.6.5)  (6.94 .125)  ( 3.5  .375)
     5.3 .8675  1.3125
Ko     7.48 is the weighted cost of capital of the Riquiqui PLC
The expected rate of return on a companys security is called the cost of capital of that security. The weighted average cost of capital is the weighted average of all the securities in the portfolio of the company. For any investment to be worthwhile, the cost of capital should be lesser than the expected rate of return. The cost of capital is the rate of return that capital could be expected to earn in an alternative investment of equivalent risk
The cost of debt is easy to calculate as it composed of the rate of interested paid and the existing corporate tax rate. Thecost of equityis more difficult to ascertain, as equity shareholders are not guaranteed fixed returns annually. The cost of equity is broadly defined as the risk-weighted projected return required by shareholders, where the return is largely unknown.
The reason the marketing manager found Interest paid to be higher on a percentage basis on the dividend declared is because, interest is a pre-tax, pre- amortization and pre preference dividend expense. All these expenses would need to be met, to declare the amount of dividend. Hence, actual dividend declared would be lower as a percentage basis when compared with interest.
It is more difficult to assess the cost of equity of a unlisted company than a listed company. This fact can be ascertained by the formula of cost of equity.
Ke       Risk free rate of return  (expected return- Risk free rate) Beta of portfolio
Out of the elements required to ascertain the cost of equity, risk free rate or return and expected return can be easily ascertained. However, calculating the Beta of an unlisted company is more difficult to ascertain, as the Beta is a description of the return of a particular stock in relation with financial market as a whole. IT would be difficult to compare an unlisted market, with the financial market as a whole.

Question V
Free cash flow statement of Gryphon PLS
ParticularsYear 1Year 2Year 3EBIT391039884500(Less) Taxes(1400)(1430)(1600)(less) Working Capital changes(60)100(80)(less) increase in fixed assets(1450)(1785)(2100)(Add) Depreciation800825875(Add) Increase in provisions450450500Free Cash Flow225021482095
Assumptions
 In calculating Free Cash flow for an organization, depreciation and provisions do not cause a cash flow change and hence are added to the EBIT
Taxes, changes in fixed assets, and changes in working capital are to be adjusted to EBIT by either adding or subtracting.
Valuation of Gryphon PLC
Weighted average Cost of Capital given  8.82
Market value of firm  PV of expected future free cash flows of the organization
 (2250 (1.0882))  (2148 (1.0882)2)  (2095 (1.0882)3)  (2300 (1.0882)4)  (2300 (1.0882)5)  (2300 (1.0882)6)
 (22501.0882)   (21481.1842)  (20951.2886)  ( 23001.4022)  ( 23001.526)  (23001.6606) 
 2067.63  1813.88  1625.8  1640.28  1507.21  1385.04
  10, 039, 880 is the Market Value of the firm
If the Free cash flow increases by 4 from the 5th year onwards, the 5th and 6th years cash flow would be  2392 (000s) and  2488 (000s )
Market value of firm  PV of expected future free cash flows of the organization
 (2250 (1.0882))  (2148 (1.0882)2)  (2095 (1.0882)3)  (2300 (1.0882)4)  (2392 (1.0882)5)  (2488 (1.0882)6)
 (22501.0882)   (21481.1842)  (20951.2886)  ( 23001.4022)  ( 23921.526)  (24881.6606) 
 2067.63  1813.88  1625.8  1640.28  1567.5  1498.25
  10, 213, 340 is the Market Value of the firm when the cash flows for the 5th and 6th years have been adjusted incrementally by 4 every year.
 The WACC defines the value of a firm as a sum of PV of expected future free cash flows of the organization. However, the assets and liabilities of the organization are completely ignored, which include tangible and intangible assets. Also, the business model of the company might not provide a correct picture of the valuation, if the valuation is with the WACC method. Some business have a longer gestation period than others, and such businesses would have lower present value of cash flows. Such organizations would have lower value as per the WACC method, which is deceptive.
    The method ignores the importance of systemic risk and the relationship between risk and return in valuing the organization. While the WACC method uses only the WACC of the organization, it ignores the causes of inflation and the importance of realistic discounting factors that are considered by the CAPM method. Due to these reasons and others, the WACC is not a holistic method to ascertain the value of an organization.

Question VI
Facts of the problem
Ocean PLCs current valuation   60 million, with 30 million shares
Sea PLCs current valuation   30 million, with 45 million shares
Expected valuation of both companies post merger   110 million
Transaction costs   3 million
Net Present Value of Acquisition  Gains from acquisition  Cost of Acquisition.
NAV of the acquisition  Vab  (VaVb)  P  E
    Where    Vab      combined value of the 2 firms
        Vb     market value of the shares of firm B.
        Va     As measure of its own value
        P       premium paid for B
        E     expenses of the operation
NAV of the acquisition          110-(6030)  20  3
                     - 3 million   
Hence, the acquiring firm, Ocean PLC would not be creating value in monetary terms through the acquisition. However, it is wrong to equate value as the sole reason for a merger, which might create synergistic business solutions beyond value.
 In the case of a cash merger, the rights of the acquired companys shareholders are bought over with the use of cash alone. As a result, the acquiring company only pays for the purchase price with any premium to the shareholders of the acquired company.
Hence, if the purchase is made in cash, the price offered for each of Sea PLCs shares will be
  (Market value of shares of PLC Premium offered on merger) Total no of Sea PLC shares
 ( 30 million   20 million    ) 45 million
  1.11 per share would be the price offered by Ocean PLC to the shareholders of Sky PLC.
Post merger value of Oceans share  (Pre-merger Value of Both firms  Synergy added) (Post merger no. of shares)
Share price of Ocean PLC before merger   2
Share price of Sea PLC before merger   .67
Hence, 3 shares of PLC would be allotted 1 share in Ocean PLC post merger.
Post merger value of Oceans share  (( 60 million   30 million)   20 million)  75 million   1.47 per share
Total Value of Ocean PLC post acquisition   110 million
If Sea PLC owns 13rd of the merged entity, the value of Sea PLC would be  36.3 million
Value of Ocean PLC  Total Value of firm  Value of Sea PLC
              110 million -  36.3 million
              63.7 million
Value of shareholder wealth lost for Ocean PLC  Shareholder loss without 13rd stake  additional loss due to this change
  3 million  6.3 million (increased value in Sea PLC due to percentage change)
  9.3 million is the total value lost by the shareholders of Ocean PLC by the merger.
When a merger purchase is done in cash or stock, there are advantages for the shareholders of both the acquiring company Ocean PLC and the acquired company Sea PLC. 
When merger purchase is done in cash
Ocean PLC would have greater control of the organization as the shareholders of Sea PLC and its management, lose complete control over management and control.
For a cash surplus organization, this is a cheaper investment, as Ocean PLC can bargain tougher in the negotiating process and get a more favorable deal.
For Sea PLC, it would be favorable if the organization has a significant debt liability that needs to be cleared once and for all.
When the merger purchase is done in Stock
Sea PLC would be the biggest gainer as Ocean PLC would need to purchase the stock of the company at significant premium.
Unlike, in the case of a cash buyout, Sea PLC gains by the increased value of shareholder wealth.
For Ocean PLC, this method is most suited if it is cash strapped and would not be able to raise fund requirements within a short period.
Most of the times the advantages are shared to both the companies, though not always in equal proportion.

QUESTION VII
The following are the conditions for a perfect market in shares to exist
There are no transaction costs, including brokerage costs
No taxes of any kind exist.
All assets are perfectly divisible and marketable.
 No regulations exist that govern the markets operations
There is no cost for acquiring information and all participants of the market have equal access to information.
All participants in the market are rational, logical and sensible, who expect utility maximization
Management works purely for the fulfillment of shareholders objectives
The market is perfectly competitive, with large number of buyers and sellers
Since there are large number of buyers and sellers, no individual would be able to influence price
Though the assumptions or conditions that make up a perfect market are unrealistic, they are very important in the understanding of financial theory. There are several aspects about the capital markets that make them impossible to study, if not for the assumptions of a perfect market. Technically, a perfect market is one where there is no possibility for arbitration. In the presence of arbitration or speculation, it would be impossible to measure the growth of the financial market, or individual stocks, as the motives of growth or decline are beyond logical explanation.
A second important implication of the perfect market is the absence of transaction costs.
In the presence of transaction costs, the decisions of buying and selling can be dependent on the cost of such transactions, instead of the opportunity that lies in the transaction.
    When a market is perfect or efficient, it implies transparent information to all the buyers and sellers in the market. Unlike till few decades ago, where information was limited to a select few about the stock market, todays stock markets around the world share information almost transparently with everyone around the world. When certain buyers or sellers have selective access to information, there is a great possibility that they might misuse the same for personal gain and hence it is important for perfect capital markets to exist, at least in theory.
    Several financial theories are based upon the assumption of a perfect market. Theorists like Miller-Modigliani have built several theories on this sole assumption and how capital structure, dividend policy of an organization can be decided. In the absence of these theories, managements would find it very tough to take important capital decisions.

    I have been giving a thorough thought to the very thought of presenting an account of Nikes performance during the last couple of years. And I find this year better than any, primarily because it will enable me to exhibit the real strengths which the company possesses and employed to bear economic shocks of recession and come out of it shinning. It is quite tempting for me to present you, all that we have achieved in the last five years, but instead I will follow a scheme which will clearly highlight the companys excellence in meeting its long term objectives and the strengths which we have capitalized upon to grab opportunities and neutralize threats in the external environment. So lets unleash the factors which led to make Nike a star which it is today

    During the last five years, Nike has surely evolved as a global player which has let it secure its position as the leader in European foot-wear market. It surely is a growth company which is all set to achieve its target of 23 billion sales by Fiscal Year (FY) 2011. And the last five years performance makes it evident that we are consistently patrolling towards achieving our target by employing our strong financial model and the skills and abilities of our team to constantly innovate products to open new horizons of success in the market place. In this regard our brand portfolio has shown a promising performance. We focus on growing six key categories namely running, basketball, football, mens training, womens training and sportswear. Not only this, but we have had expansion in regions outside US worth mentioning growth was observed in China, Russia, Brazil, India and Jordon. It is important here to mention that we have been able to achieve growth in our portfolio by remaining committed to the sports culture in various regions to provide impeccable customer service. We have invested in subsidiaries and acquisitions which we believe will be able to strengthen profit centers for Nike, particularly Converse, Cole Haan, Nike Baur Hockey and Hurley have been showing increased growth in revenues in the last couple of years. Not only this, but we have also successfully implemented changes that have improved our operational efficiency and supply chain management. We have better forecasting and inventory management skills now which enable us to adopt lean manufacturing so that we manufacture in the most profitable manner. Most importantly, the product development has had immense investment which now enables us to utilize digital sampling and 3D models so that development costs can be reduced. I am focusing specifically on cost control primarily because recession in the last couple of years could have hurt us bad, if we would not have controlled our cost.

    For all I know shareholders are not highly impressed by words, but for them numbers speak louder than words. Hence, I would steer the direction towards presenting the trend of main performance indicators during FY 2005-2009 to substantiate my claim for holding a strong financial structure. For reader assistance, graphs will be incorporated so that a mere glance can help examine the performance of the factor in hand.

    Liquidity position of the company has been showing a mixed pattern of increase and decrease but we have made secure investments in marketable securities which enables our net working capital to remain on satisfactory levels. Moreover increasing and consistently positive cash flows from operations improve the overall liquidity.

     Asset management has been impeccable with turnovers being quite stable in the last five years. It is the immaculate management which has made us pass recession in the last couple of years. Moreover, to support the increase in brand portfolio, it was a dire a need to manage assets as efficiently as possible and our teams have not disappointed our shareholders in this regard as well.    

    Profitability has been impressive during the last five years particularly by the advent of subsidiary brands generating greater revenue, expansion into global market and increased customer demand because of better and innovative products. This golden performance era has been reflected by our margins and returns which enabled us to provide double digit returns despite the severe economic recession hitting the global economy. In this regard, undoubtedly, we did have a fall but we took every possible step which could neutralize the shock of recession on our financial performance. Consequently, we cut costs to improve operational efficiency and provide consistent EPS and dividends to our shareholders. A worth mentioning factor here is the rising price of our stock in the market which itself is signal of investor confidence in our management abilities.  However, I would not remain ignorant to the decrease in profitability due to downturn in global economy however, we have been lucky to have controlled the extent of downfall, unlike many other players in the industry. It must be mentioned here that we have seen exceptional operating profit in the last year which is a strong evidence of our successful cost control implementation program.

    Last but not the least we have been witnessing rising sales and rising dividends per share in the last five years. Moreover, we have strategically planned to increase assets so that in the long run we can utilize our assets to generate revenue of 23 billion by FY 2011 as per our long term goal. Not only this but we have designed our capital structure in a way that it does not associate extensive financial risk to the company but it enables us to enjoy financial leverage so that we can have increased ROE each passing year, particularly in favorable economic conditions.

    Here, I must say that we are not only operating to increase the wealth of our shareholders, but we want to operate as a strong element working towards the betterment of our community. In this regard Nike foundation has introduced Girl Effect and Let me Play community projects, which is a small effort to establish the fact that children today become the leaders tomorrow.

    In the end I would conclude this letter by establishing the fact we are strengthened by strong brand loyalty, innovative products, powerful brands, operational efficiency and financial power. Hence, with economy glistening in the coming years, we are all set to move ahead with confidence in plans to grab better and even better opportunities.

A financial reform bill is produced in Washington with speculation whether the new law would alter swaps trading once it is formally passed. This law seems to come as a relief to the banks which have had dominance on over-the-counter derivatives. This is so because, according to the new legislation, banks will no-longer use separate entities in revolving off derivatives such as interest rate (Mackenzie, 2010). Despite the fact that some commodities such agriculture, energy can be cleared, their derivatives would be spun off. Most leading banks seem to have succeeded in insulating their profitable derivative franchise through utilizing interest rate which has accounted for more than seventy percent of the exceptional global OTC derivatives. The regulators in the banking industry will have new roles and goals to meet such as coming up with a clear way of executing swap facility that must be understood by all the stakeholders (Mackenzie, 2010).

The entrenchment of the electronic trading is determined and the mode of clearing swaps that caters in for the current customers and competitors of the select banks. Advantages of the electronic trading are evidenced in its transformation of buying and selling government bonds, energy, equities and currencies (Mackenzie, 2010). Electronic trading usually bridges the gap between sellers and buyers thus reducing monopoly of any firm that is currently in the market by giving new entrants a chance. The introductions of the electronic trading, traders who have put in place computers with high-frequency are key elements in process. Electronic trading shall help the new entrants in the market trade directly with the big banks thus making interest rate swaps real since they will no-longer be their clients. If such a trading occurs, the profits of the big dealers ill decrease and this will help in distributing the risk on top of making the price of the swaps transparent.

Starbucks began operating in 1971 in Seattle. By 1992, it had grown into a public company with over 160 outlets. Starbucks Corporations shares are listed and traded NASDAQ, under the trading symbol SBUX. While it initially started with roasting and selling coffee, tea and spices, Starbucks Corporation of today has a lot more to offer. (Company Profile, 2010)

Type of Products Offered
Starbucks Corporation sells 30 blends and single origin premium Arabica coffees, fresh brewed coffee, hot and iced espresso beverages, coffee and non coffee blended beverages, Vivanno smoothies and Tazo teas. Apart from the different types of coffee and tea, Starbucks Corporation also sells beverage related accessories and equipment including home espresso machines, coffee brewers and grinders, coffee mugs, packaged goods, music, books and gift items. Among eateries, Starbucks offers baked pastries, sandwiches, salads, oatmeal, and yoghurt parfaits and fruit plates. Other of its products include the bottled Starbucks Frappuccino beverages, Starbucks Discoveries chilled cup coffee, Starbucks DoubleShot espresso drinks, Iced Coffee, whole bean coffee, ice creams etc (Investor Relations, 2009) (Company Profile, 2010).

Countries It Operates In
As of 2009, Starbucks Corporation boasts of almost 17000 stores, among which only 7856 are licensed stores while the rest are company operated. The company operates in more than 50 countries, the list of which is given below.

Argentina, Aruba , Australia, Austria, Bahamas, Bahrain, Belgium, Brazil, Bulgaria, Canada, Chile, China, Cyprus, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hong Kong, Indonesia, Ireland, Japan, Jordan, Korea, Kuwait, Lebanon, Malaysia, Mexico, New Zealand, Netherlands, Northern Ireland, Oman, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Scotland, Singapore, Spain, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, United States and Wales. (Company Profile, 2010)

Size Relative to Industry
Starbucks Corporation enjoys 1.7 of the total market share (TNS Media Intelligence). Coffee consumption in America has increased as consumers become more informed about different varieties and qualities of coffees that exist. The coffee market has faced challenges in the form of rising coffee bean and milk prices, however, the not-so-declining sales growth of various coffee companies have confirmed the existence of a relative inelastic demand for coffee. The National Coffee Association estimates that the US coffee market will reach 29 billion in 2011, while the Starbucks market capitalization in 2009 amount to 19,372.6 million (US and other countries) (Annual Report 2009, 2009) (The National Coffee Association, 2008).

Performance over the last 23 years
The year 2009 saw Starbucks Corporation reducing its stores from 16, 680 to 16,635 as part of its restructuring plan but the stores were still 1624 more than from the year 2007. As mentioned in the annual report, Starbucks Corporation faced increasing challenges during the recent years in the form of new competitors, changing consumer demands, global recession and complacency on the part of the company. In the wake of the aforementioned challenges, the net revenues of the company dipped to 9.8 billion from 10.4 billion of the year 2008, a 5.7  decrease. However, the net revenue figure was still a slight improvement from the year 2007, standing at 9.4 billion. Starbucks Corporation faced a 6 decline in its relative sales growth as compared to the year 2008 - its second year in declining sales growth since 2007, the major cause of the decline being slow customer turnout at the stores due to increased competition coupled with recession. The operating income of the company however, increased 54 million to 894 million from the year 2008 but slid down from the 2007s operating income of 1054. (Starbucks Coffee Company Annual Report 2009, 2010)

Starbuckss diluted earnings per share performed better by increasing to 0.80 from 0.71 of 2008  a percentage increase of 12.6. However, in 2007, the diluted EPS stood at 0.87. Starbucks seemed to have fared better in cash flow management as its cash from operations increased to 1389 from 1259 of the year 2008 and 1331 of the year 2007. The company spent less on its capital expenditures in 2009 than in the previous years, probably savings its reserves for the time when the company experienced greater sales growth. (Starbucks Coffee Company Annual Report 2009, 2010)

Financial Structure and Comparison
In the year 2009, Starbucks Corporation financed its assets from 3045.7 million equity and 2531 million of liabilities. Thus, the total assets of the company amounted to 5576.8 million in 2009. The accounts payable of the company decreased 12 from 304.9 million to 267.1 million implying better credit control and cash management by the company. The current portion of long term debt decreased from 0.7 million to 0.2 million, depicting declining debt burden on the company (a 72 decrease to be exact) (Starbucks Coffee Company Annual Report 2009, 2010).

The total current liabilities of the company decreased from 2189.7 million to 1581 million in 2009, thus improving the quality of its earnings as they are being less financed by debt and more by equity. Starbucks long term debt also decreased 0.3 million since 2008 while its other long term liabilities saw a decline of approximately 42 million (Starbucks Coffee Company Annual Report 2009, 2010). Analyzing only these basic figures clearly shows that Starbucks had its debts well managed and has no imminent liquidity problems.

Starbucks current ratio current assetscurrent liabilities stands at 1.28, implying that for every  of liability, they have 0.28 assets more to pay it off. (Starbucks Coffee Company Annual Report 2009, 2010) Caribou Coffee Company one of Starbucks competitors has a better current ratio of 1.44, implying a better liquidity position than that of Starbucks, even though its total current assets and liabilities are considerably lower than that of Starbucks (Caribou Coffee Annual Report 2009, 2010). Starbucks quick ratio current assets  inventory current liabilities for the year 2009 stands at 0.86, a ratio that is quite low from its current ratio and is less than 1, implying that leaving inventories aside, Starbucks has a deficit of 0.13 of assets for every  worth of liabilities they have (Starbucks Coffee Company Annual Report 2009, 2010).

Compared to Caribou whose quick acid test ratio amounts to 1.02, Starbucks quick ratio is worse off. While Caribou has an additional 0.02 of assets (excluding inventories) for every dollar worth of liabilities, Starbucks face a deficit portraying that Starbucks liquidity position is lower than that of Caribous (Starbucks Coffee Company Annual Report 2009, 2010) (Caribou Coffee Annual Report 2009, 2010). However, one important consideration to be taken into account is of the inventory valuation methods used by both the coffee chains. If Starbucks is using First In First Out method of valuing inventory in times of rising prices, its closing inventory would show the cost of inventory at inflated prices, thus giving its inventory figure a greater total decreasing its quick acid test ratio. For the aforementioned considerations, it is imperative to not consider the ratios in isolation and carefully study the accounting policies, methods and estimates used by the companies being analyzed and compared. (Financial Ratio Explanations)

Leverage ratios are used to depict the solvency of the company. While liquidity ratios predict the short term ability of the company to survive, the leverage ratios can be used to identify whether a company is moving towards bankruptcy or has enough assets to survive in the long term. The debt to assets measure total assets against total liabilities while the debt to equity ratio measures total liabilities against the total shareholder equity. (Financial Ratio Explanations) The debt to asset ratio for Starbucks for the year 2009 is 2.2, indicating that it has enough total assets to pay off its liabilities in the long run (Starbucks Coffee Company Annual Report 2009, 2010). However, Caribous debt to asset ratio equals to 8.29, a considerably better ratio than that of Starbucks. Analyzing the ratios clearly presents Caribou in a favorable light as compared to Starbucks as far as liquidity and solvency of the company are concerned. (Caribou Coffee Annual Report 2009, 2010)

The debt to equity ratio that measures the ability of a company to borrow funds from the capital market should preferably be lower, as a company with a high debt to equity ratio may be find that its borrowing capacity is quite limited as banks prefer lending to companies that are not very leveraged (Financial Ratio Explanations). The debt to equity ratio of Starbucks is 0.83 while for Caribou it is 0.22, again a considerably better leverage ratio than that of Starbucks (Starbucks Coffee Company Annual Report 2009, 2010) (Caribou Coffee Annual Report 2009, 2010).

The debt to capital ratio of the company gives an idea of the financial structure. It is measured by dividing total debts by a sum of equity plus debt. The higher the ratio, the more a company is taken to be geared. A high debt to capital ratio indicates that a company lacks in financial strength. Starbucks debt to capital ratio is 0.45, while for Caribou it is 0.12. Even though, the ratio for Starbuck does not really indicate a threat to the continuity of the company, it is quite worse than that of Caribou, implying a much greater reliance on debt for financing its operations (Starbucks Coffee Company Annual Report 2009, 2010) (Caribou Coffee Annual Report 2009, 2010).

Synoptically, the financial structure of Caribou is much better than that of Starbucks. However, considering the ratios of Starbucks from a stand-alone point, they do not portray an alarming picture and are reasonable enough for a coffeehouse. In fact, its liquidity ratios show that its working capital is well managed and efforts have been made to keep the company from borrowing excessively. 
Weighted Average Cost of Capital
The WACC of a company is calculated as follows
Wd rd (1-t)  wprp were
Where Wd is the proportion of debt that the company uses when it raises new funds. Rd is the before tax marginal cost of debt. T is the companys marginal tax rate. Wp is the proportion of preferred stock the company uses when it raises new funds. Rp is the marginal cost of preferred stock. We are the proportion of equity that the company uses when it raises new funds. Re is the marginal cost of equity (Curriculum, 2009).
Ke 1.2 1.2 1  kd (1- tax) 0.83 0.831

There are several methods of estimating the cost of equity. One of them is called the dividend discount model, which uses growth in dividends to identify the expected of equity and the capital asset pricing model. Capital is not tax deductible so no adjustment is made to it as in cost of debt. The weights in the formula are calculated from the market values of equity and debt. However, in this case since no information has been given about the market value, we have assumed the book value to be the market value of both equity and debt.
As Starbucks has never paid dividends on its ordinary shares, the Dividend Discount Model cannot be used to estimate the cost of equity.  Through the CAPM model,
Ke  Rf  Beta (Market risk Premium)

The yield on 12 month Treasure bonds is 0.25 so we assume the Rf is 0.25. The Market risk is 4.820 which makes the market risk premium 4.57. Assuming a beta of 1, the cost of equity comes to be 4.82. (SP 500 Index Summary, 2010)

The cost of debt can be calculated from the yield to maturity approach that uses the IRR (internal rate of return) method to calculate the yield. It is the annual return that an investor earns on a bond if the investor purchases the bond now and holds it till maturity.  The other method is through following the debt rating agencies.

Description of the Project
Assuming Starbucks has the finance and equity to finance the project, the company can invest in delivery vehicles that can enable Starbucks to supply food and beverages to offices or universities or in homes. To compensate for the increased cost, Starbucks can charge a minimal amount on delivery, say, 2 of the full value of the order. Consistent with the objective of Starbucks of expanding the Starbuck experience to new territories, the project can be a viable option and will increase Starbucks outreach in the existing markets and bring back its lost customers.

Identifying Costs
The initial investment cost can be identified by contacting realtors in India about promising locations and cost of them. As Starbucks will be entering into a new market, it is imperative to consider all options of entry and exit (in case of unsuccessful results). The company should consider leasing the premises as opposed to buying, as it will manage its cash flow more effectively. The annual revenues can be estimated by determining the demand in the area, by carrying out market research, competitors price and revenues, their market shares and the purchasing power of the people. The annual operating costs will include such expenses as the costs of running the store, from electricity expenses to rental leases etc. These costs, again can be estimated by considering a competitor in the region. Inflation rates can be estimated from the Consumer Price Index of the country while the tax rates, reliefs and allowances can be estimated by the most recent fiscal budget or government press releases and announcements. 

Dealing with Uncertainty and Risk
As an appraisal of investments uses a lot of forecasts and uncertainty in their financial evaluation of the project, it is necessary that the uncertainty can be quantified and estimated in some way to be incorporated in the investment appraisal. One way to incorporate risk and uncertainty is to use sensitivity analysis. The analysis starts by asking what if questions. For example, What if the cost of raw materials increased by 10 Will the project still be profitable Would there be any cash flow problems Etc.  (Lynch, 2008).

Other methods of incorporating uncertainty in the analysis are of simulation and expected values. Expected value is the weighted average of all the possible outcomes, with the weightings based on the probability estimates. It is not the most likely result but it identifies the long run average outcome. Simulation goes further than sensitivity analysis by finding out the impact of changing more than 1 variable all at once. Using mathematical models, it produces a distribution of the possible outcomes from the project. The probability of different outcomes can then be calculated. (Lynch, 2008)
Financial Forecast and NPV with the incorporation of uncertainty and risk
Years20092010201120122013 onwardsCost of delivery vans(20000)Incremental Sales 8000 8725 12000 17000Fuel costs (1000) (1000)(1500) (2000)Staff costs (1000) (1000) (1000) (1000)Repair and Maintenance(1000)Tax payable  30(1800)(2017)(2850)(3900)Net cash flow(20,000)4200470766509100Discount Factor (WACC) 5PV(20,000)4000426957447486NPV  1499

Uncertainty needs to be incorporated in the analysis by carrying out sensitivity analysis. It is calculated from the following formula
Sensitivity margin  Net Present Value Present Value of parameter to be considered X 100
The higher the sensitivity margin, the less sensitive the decision will be to the parameter being considered. Small changes in the estimated would not the change the project decision from accept to reject (Lynch, 2008).

Sensitivity to initial investment  1499 20000 X 100  7.5
An increase of 7.5  in the cost of investment of the delivery vans will cause the NPV to fall to 0. The NPV is highly sensitive to the cost of investment and even a slight increase in the cost of the delivery vans are likely to impact NPV adversely by a greater amount, making the project unprofitable.
Sensitivity to Fuel Costs  1499 2000 X 100  74.5

An increase of 745 in the fuel costs will cause the NPV to fall to 0. If the percentage increase in the price is greater than B, the NPV will be negative and the project will not viable.
However, there are disadvantages to using sensitivity analysis. It assumes that the variables change independently of each other and does not incorporate the impact of changing variables on other variables, apart from the NPV. It does not incorporate the probability of a variable changing and has no clear decision rule of accepting a decision (Lynch, 2008) (Curriculum, 2009).

Quarterly Report
To Board of Directors
From Project Managers
Subject Project Performance
Period  Jan  March 2009

The first quarter since the project has been started has seen a right hand shift in the demand by consumers. Most of the demand has come from workplaces, during the 9 to 5 slab. The increased demand from free delivery of Starbucks food and beverages has also eaten away some of the demand from its coffeehouses because of a process called cannibalization. However, we have developed a plan to increase revenue from the project by improving the marketing strategy, rebuilding customer loyalty and by offering various discount deals.
Below is the budgeted performance of the project and its actual performance for the quarter Jan  March 2009.

YearsBudgeted Actual DifferenceIncremental Sales20001800200Fuel costs250350100Staff costs250250-Repair and MaintenanceTax payable  30450360Net cash flow1050840210
The net cash flow is 210 less than budgeted because of the following reasons
The fuel costs estimated for the duration was understated. The increase in fuel costs have increased the costs of delivering by almost 40 which is a substantial increase in costs.
Staff costs were correctly predicted but as demand increases, there will a need for more delivery vans and drivers, thus an increase in variable costs are likely.

Also, no expenses were made for repair and maintenance as the delivery vans are new but the vans are required go for maintenance check semi-annually which will further increase the cost of the project.

Increasing the demand for the products cannot be undermined if the project is to stay profitable in the long run. Improved marketing strategy and better consumer deals have to be used to attract consumers in times of rising prices and recession.

Financial forecasts are projections of future financial outcomes for firms. These financial forecasts are based on the firms past financial statements and sales revenue, which are used in combination with the market and economic indicators to foresee the possible financial occurrences that are likely to emerge within a given period of time, usually in a financial year. This is the means by which economists are able to predict either better or poor financial prospects for a given firm (Besley and Brigham, 2008).

Financial forecasting illustrates the process through which companies reflect on their current positions and then determine policies that strategically position them for the future. It is through the forecasting process that companies get the opportunity to precisely articulate their objectives and priorities and ascertain that their internal organizational structures are consistent with their overall strategic goals. This process also helps the company to identify the resources needed and the requirements for external financing (Epstein and Lee, 2010). Take sales forecast as an example, it is a primary variable in the forecasting process. Given that, for the most part, balance sheet and Income statement accounts are correlated with sales, the forecasting process is capable of assisting the company evaluate what additions to the current and fixed assets are necessary, to bear the forecasted sales revenues. Correspondingly, the external financing that may be required to pay for the forecasted expansion of resources can also be determined (Gitman, 2007).

Different from afinancial planor abudget, financial forecasts do not have to be utilized as financial planning tools, rather they are frequently used by market analysts to project a firms potential growth during the subsequent financial year (Hofstede, 2003). Abudgetis a record of the entire projected expenditures and revenues. Budgets are plans for cut backs and expenditure. That is to say, they are organizational financial schedules stated in fiscal terms. In most companies, the objective of drawing up budgets is to present a forecast of income and expenses, that is, create a model of how the firm may possibly perform financially when definite policies, events and plans are executed. Budgeting also facilitates the gauging of actual financial operation of the firm against the financial forecast (Epstein and Lee, 2010).

Proforma financial statement describes a financial statement prepared on the basis of some assumed events and transactions that have not yet occurred (Gitman, 2007). Past financial statements are utilized in gauging a companys historical financial performance and its current condition. In the absence of past financial statements, financial scrutiny and assessment is not feasible and the firms management, directors, shareholders, and clientele would not know whether the company is doing well or poorly (Besley and Brigham, 2008). Proforma financial statements focus on the future instead of the past and are based upon hypotheses rather than real facts. Proforma statements permit managers to apply definite quantities of resourcefulness and elasticity.

Proforma statements reveal a vibrant setting in which variation is probable and the range of choices that can be selected is diverse (Hofstede, 2003).They take the structure of the statement of adjustments in financial position, the income statement and the balance sheet. Proforma statements are utilized for financial scrutiny and ought to be created at the start of every financial planning cycle or every time a firm is evaluating a move that could have a considerable financial effect (Megginson and Smart, 2008). They are frequently scrutinized when a firm is considering an acquisition, external financing, capital investment in fixed assets, expansion of production, launching a new product line, or any other business operation with significant financial raminifications.

Budgets typically include proforma income statements and balance sheets to review financial performance for specific time periods and financial conditions for specific dates (Hofstede, 2003). Proforma income statements are typically dynamic planning documents. Should the scrutiny of a companys proforma show that financial trouble looms, there ought to be enough time to make changes that will enhance the companys financial performance (Besley and Brigham, 2008).

PART A Hedging Techniques and Cash flows
Hedging has been defined in various ways to mean the approach which a company utilizes to eliminate foreign exchange risk while still maintaining its business operations with regard to financial transactions with other countries (Oliver, 2000, p. 41). It follows therefore that when corporations are dealing with payables and receivables, they must exchange their home currencies with foreign currencies and vice versa. Following the increased volume of world trade and the permission of exchange rates of major currencies to float freely against one another, there has been a significant escalation of foreign currency risk which has greatly affected many international trade companies (Raimond  Shohreh, n.d). In addition, for investors planning to diversify their portfolios in the international market fluctuating exchange rate together with investments in domestic assets, have also escalated foreign currency risk. It follows therefore that unlike in some major multinational companies that utilize various tools to minimize on foreign currency exposure other companies on the other hand are limited to their hedging options to their foreign exchange rate risk (Raimond  Shohreh, n.d).

Raimond  Shohreh notes that in order to manage the currency risk effectively,  different approaches have been utilized ranging from multi-currency diversification, currency swaps as well as hedging techniques such as future, forward and options providing different degrees of profits potential and risk reduction. As a result hedging has been very instrumental not only in protecting corporations from incurring and offsetting losses but also ensuring that these corporations realize profits from foreign exchange.

Hedging with Forwards
These are the customized agreements among parties to fix the exchange rate for a determined future transaction meant to eliminate risks associated with exchange rate volatility. One assumption made in this form of hedging is the provision that a party will easily get a counter party who will agree to fix future rate for the time period and amount in question.

Hedging with futures
Here the parties agree today to buy or sell a particular currency at a future date at a particular price which they agree today. Despite future hedging sounding more like forward contract, future hedging is considered more liquid because it is traded in an organized exchange of the future market. In future hedging, one needs to buy futures if the risk constitutes an appreciation of value. On the other hand, if the risk involves depreciation of value then one need to sell futures (Oliver, 2000, p. 4).

Hedging using Options
In currency option, the parties enter into contract whereby the buyer of an option has no obligation but the right to sell or buy a specified currency from the seller of the option at a specific exchange rate before or at a specified date. Hence in hedging option, the buyer enjoys the right while the seller of the option on the other hand enjoys an obligation. Therefore with option market hedge, the current MNC will be protected from adverse exchange rate movements and still allow this MNC to benefit from favorable exchange rate movements (Oliver, 2000, p. 3)
Through call options, this MNC will be able to cover currency risks for the accounts payable
Call option helps MNCs to manage currency risks for accounts receivable
Money Market Hedge

This involves entering into a contract and then looking for the source of the fund to implement that contract. Hence in order to hedge exposure of transaction this technique differs from forward contract in that in money market hedge the cost is determined by the differential interest rate while in forward hedge cost is from discount or premium (Oliver, 2000, p. 7).

Other hedging Techniques
A cross Hedge- is normally applicable when there both forward and future markets are not available. The technique is designed to hedge exposure in one currency through the utilization of other contract or future on another currency that has an association with the first currency (Nerijus, 2008, p. 71).
A swap-market hedge- this takes the form of a credit swap, a currency swap, an interest rate swap, and back to back loans. It is an agreement between two parties to exchange cash flows in two different currencies between two MNCs (Nerijus, 2008, p. 79)

Exhibit 1. Review of Techniques for Hedging Transaction Exposure
Hedging techniqueTo Hedge PayablesTo Hedge ReceivablesFuture HedgePurchase a currency futures contract(s) representing the currency to the PayablesSell a currency future(s) contracts representing the currency and amount related to the receivablesForward hedgeNegotiate a forward contract to purchase the amount of foreign currency needed to cover the payablesNegotiate a forward contract to sell the amount of foreign currency that will be received as a result of the receivablesMoney market HedgeBorrow local currency and convert to currency denominating payables. Invest these funds until they are needed to cover the payablesBorrow the currency denominating the receivables, convert it to the local currency, and invest it. Then pay off the loan with cash inflows from the receivables.Currency Option HedgePurchase a currency call option(s) representing the currency and amount related to the payablesPurchase a currency put option(s) representing the currency and amount related to the receivablesSource International financial management By Jeff Madura online on fileCkimkimhedgingHEDGINGbest20material20for20hedging20techniques.htmvonepageqffalse
Forward Exchange Rate
Forward exchange rateSpot Price  future value of quote currencyfuture value of Base currency
Forward exchange rate S(1rq)n
                                               (1rb)n    where Sspot Price
                                                         rq interest rate of quote currency
                                                         rb interest rate of base currency
                                                         n  number of compounding periods

httpthismatter.commoneyforexfx_forwards.htm
Cash flows on the other hand have been defined to mean the difference between the money in and the money out. It is from cash flow that a company will realize that an over flight of debt is normally an indication of a company failure whereas an over flight of the liquid funds is a sign of success. Altogether, cash flow as a factor of valuation is a fundamental attribute for prediction regarding the future of the company.

Computation of cash flows
Foreign transaction hedged using Money Market Hedging under Interest Rate Parity and FX spot-forward arbitrage or covered interest arbitrage method

The current research will utilize Cross forward contract but under Interest Rate Parity and FX-spot forward arbitrage which is also known as Covered Interest arbitrage. This is based on the underlying problem of having alternative options in hedging using option while lack of data and other information which could allow making of future predictions poses a great problem of utilizing the future hedging technique (Khoury  Chan, 1988, p. 13) The application of forward hedging technique presumes that in hedge receivables the forward contract representing the amount receivables will be sold. On the other hand, in hedge payables it is presumed that currency amount representing all payables will be bought. This as a result will help to easily eliminate the exchange rate risk. More still, the model will assume that there is a formal trading facility between parties (Sayuri, 1997, p. 47).

    Let X and Y be the domestic currency and foreign currency respectively in which payables or receivables are dominated. In this case if the amount payable or receivable is K units of Y due at (tn), where t represents the time at which the transaction is concluded, it follows that the domestic currency value payables or receivables under no hedging decision, (Schooley  White, 132)
Hence,  VN  KStn (x  y)..(1)

Where Stn (xy) is the spot exchange rate that will prevail at time tn    
However, since the exchange rate at time t is not known, it means that fluctuations of the spot exchange rate between time t and tn will result to the rise of foreign exchange risk.

Money Market Hedging
In order to meet the payables or receivables the MNC will require the present value of K. in this case K(1i) where i is the interest rate of foreign company. The domestic currency value of the present value of receivables or payables is equivalent to KS (1i). This amount is initially borrowed and finally when it is repaid at time tn, the total of interest and principal amounts to KS (1i)  (1i), here I is the interest rate of the domestic company covering period between t and tn. based on this therefore, the domestic currency value of receivables or payables which is locked with the help of market hedge is
                                                       Vr  KFt   where F-bar is the interest parity forward rate, hence
                             Ft (F-bar)  St (1it). (2)
                                               (1it)

It should be noted that whenever FtFt (bar) then the covered interest parity holds hence there is no difference between money market hedging and direct forward hedging. Tabulations are as per Excel sheet attached.
RECEIPTS
Letin Inc. in Mexico (amount MXN 2,600,000 spot rate  18.5665).
Hence Forward rate  1  (4.5  35360) 1  (8.10  35360)  spot rate
                         (1  0.004375) (1  0.007875)  18.5665
                        0.996527347  18.5665  18.50202499
Forward rate  18.50202499 peso per pound on 4th February. 2010.

Now using Covered Interest Arbitrage
                                                                                               MXN 2,600,000
At 4.5 interest  (0.0452,600,000)...............2,717,000
MXNUK Spot rate18.5665
Sell MXN 2,600,000 worth of Euros  (18.56652,600,000)48,272,900
Value at 8.1  (0.081 48,272,900)  (48,272,900)                    52,183,004.9
Forward rate                                                                                       18.50202499   
(52,183,004.918.50202499)  2820394.25
The company will sell MXN 2,600,000 at forward rate  18.50202499 thus receiving amount of money in pounds  2820394.25-2717000  103,394.25 on 4th Feb. 2010.       

Part B
Possible sources of international short-term financing to reduce cash deficit
In reference to Hallit (1999, p.88) diversified Multinational Corporations which have their operations in different countries are better positioned to utilize more debt in financing as opposed to domestic firms. This is based on the notion that these MNCs are more likely to diversify their cash flows which reduces their potential in experiencing fluctuation in their profits while helping in reducing risk of bankruptcy (Rawls  Smithson, 1990, p.88). However, many corporations periodically require short-term financing decisions mainly to support other parallel operations. Based on the fact that MNCs have access to other sources of funds, their decisions for short-term financing are complex as compared to other corporations. However, they are advised to determine for the availability of any internal funds before they opt for outside sources. Parent corporations for various MNCs can provide for short term financing and especially by increasing their markups on the supplies that they send to their subsidiaries. In this case, financial managers have great tasks in determining the various advantages as well as disadvantages associated with various short-term financing.

Euro notes
These are unsecured debt securities with a maturity rate ranging from 1-3-6 months and underwritten by commercial banks. The interest rate on these notes is normally based on the interest rate that any Euro bank will charge the respective interbank loans. Euronotes could take the form of such facilities like note issuance facilities (nifs), standby note issuance facilities (sniffs) which are considered substantially cheaper source of short-term funds as compared to syndicated loans the reason being that Euronotes are placed directly with the investor public in form of underwritten and securitized form that normally allow the establishment of liquid secondary markets. To this end, some MNCs will tend to roll over Euro notes as a form of intermediate-term financing to maximize the value of that particular MNC (Jeff, 2007, p.582).

Use of Euro-commercial papers (ECP)
Many MNCs will seek to obtain short-term financing through the issuance of Euro-commercial paper. This approach is fundamental with regards to the fact that many dealers will take to issue the paper without reference to back up of an underwriting syndicate. The method has advantages based on the provision that, it is possible to tailor the maturities in preference to the issuer. On the other hand, dealers normally offer to repurchase the Euro-commercial paper right before its maturity through its secondary market the paper is normally sold at a discount or with a stated coupon. However despite the fact that many banks are in a position to issue the note in any major currency, 90 of the issue of the note is mainly through the U.S Dollar (Jeff, 2007, p.583).

Direct Euro bank loans
Another source of short-term financing for MNCs is the direct loans from Euro banks which is normally made use off immediately other sources of short-term financing is unavailable. This source of financing is meant to maintain a relationship with Euro banks and especially through credit arrangement with various banks worldwide (Jeff, 2007, p.583).


Part C.
Revaluation and devaluation under the system of a fixed exchange rate is the official changes in the value of a particular countrys currency relative to the currencies of other countries. On the other hand, under the system of floating exchange rate, a country experiences currency depreciation or appreciation in respect to the value of other countrys currency which are normally generated by market forces. Under the system fixed exchange rate, and by the influence of market forces, both revaluation and devaluation may be conducted by the policy makers (David, 2002, p. 7).

Macroeconomic factors
The microeconomic factors that should be considered are GDP (Gross Domestic Product), unemployment rate, inflation rate, interest rate and the level of exports and imports. Below is a comparison of Russia and Japan in the macroeconomic factors to determine the appropriate investment destination between the two countries. Russias commodity driven economy GDP growth rate for the first quarter 2010 is 2.90  which is 2.59 of the worlds economy, in 2009 and 2008 the GDP averaged at -7.93  and 5.90 respectively. The GDP has been on a constant decline over the past four quarters. This years growth is attributed to the increases in oil prices, low rates of interest and economic stimulus programs. Japans industrialized economy GDP growth rate for the first quarter of 2010 is 5.00 . This makes up 8.2 of the world economy the second largest economy in the world. In 2009 and 2008 the GDP averaged at -0.98 and -4.18 in that order. Japan has a well educated human capital and is largely efficient in its international trade but has expenditures of raw materials which are deficient in the country (Fedec, 2010). Japans interest rate is 0.10 while Russias interest rate is 7.75. Though higher than Japans, Russias interest rate has been low historically, this has caused a cut back in the refinancing rate to 8 by its central bank and thus its future growth prospects are assured (Fedec, 2010).

Inflation is the rise in prices in the general economy against standard purchasing power. Japans rate of inflation stands at 0.7 in June, its average inflation for 2009 and 2008 were -1.70 and 0.40 in that order. This level of inflation was accompanied by a 2.1 drop in consumer prices this however does not divert the pressure on the central bank to address deflation.  Junes 2010 inflation for Russia is 5.80, its average inflation for 2009 and 2008 were 8.80  and 13.30 in that order (Trading Economics, 2010). In terms of unemployment, Russias unemployment rate from January to June 2010 averages 8.1 , in comparison with the previous year 2009 whose unemployment rate stood at 8.41. Japans rate of unemployment from January to June 2010 stood at 5.1  a comparative percentage to the previous year 2009 whose unemployment rate stood at 5.1 (Trading Economics, 2010). Japans high levels of unemployment are impeding the economys recovery from recession however the Prime Minister has put in place a package that will lower inheritance tax to encourage the passing of inheritance to young people and in the process spur the creation of jobs (BBC, 2010). Russias unemployment was highest in January where a staggering 6.8 million people did not have jobs and 630,000 lost their jobs in the same month. This trend is expected to continue as the resources given to regional governments to continue paying industrial workers who have been rendered idle by slowing stagnation dries up (Andrea, 2010)

In May 2010, the exports from Russia were US 31.6 Billion, being mainly dominated by oil and natural gas. Thus international energy prices are critical to Russias economy. In 2007 the exports made up for 8.7 of GDP. Russian exports are mainly raw materials such as minerals and fertilizers. Its fishing industry is number four in the world. Exports from Japan were valued at JPY YEN 5027.6 billion in May 2010. Japans economy is heavily reliant on exports for growth, exporting electronics, optical fibres, copiers and automobiles. Although the exports in June 2010 were higher than the previous years the rate of increase however slowed for the fourth consecutive month. This is an indicator that Japans path to economic recovery is being checked by declining oversees demand (Trading Economics, 2010). Russias imports for May 2010 were US 19.4 billion. According to CIA (2010) its imports for 2009 totalled 191.8 billion in comparison to 2008s 291.9 billion which was a remarkable decline. Japans imports for May 2010 were worth JPY YEN 4636.6 billion, these imports are mainly raw materials for processing. Its total imports for 2009 were 499.7 billion a decline from 2008s 708.3 billion (CIA, 2010).

Managing Political Risks
In todays increasingly global market place, risk management is of great importance to the consequences of economic investments. Apart from managing risk, determining the appropriate way and method to mitigate risks is paramount to the ultimate success of the investment. In money market for instance of the major and inherent considerations should be the political risk of the host country. Alan, Aitken Vrooman (2) provides that whenever an investor of foreign currency is evaluating a prospective investment, it is fundamental to also evaluate and manage political risk in addition to market and geological risks. With the current example, while considering devaluation and revaluation of currency in Russia and Japan respectively, there is great importance attached to exchange rate coverage as well as mitigation of political risks of the two nations. This relates to the fact that currencies for the two countries are not in fixed rates rather they are prone to  vary dependent on a multitude of factors such as political instability, demand and supply, speculative movements, political-economic situation as well as variations in monetary interest.

Consideration of political risk therefore is paramount in the evaluation of revaluation in Japan as well as devaluation of currency in Russia especially to help cater and protect against any loss due to host government actions which in a way may eliminate or even reduce control. Hence it will cover for nationalizations, explorations and even confiscations.

Japans political risk can be viewed in five ways its fiscal dilemma, governance challenges, the independence of central bank, currency intervention and the funding that goes to scandals. The government in place is undecided between recession avoidance through economic stimulation and the growing dissent among the public and investors of the sky rocketing public debt (400  of GDP). There is an increase in the bond yields and government revenue is less than half of government spending.  The current government won after a pledge to reduce wasteful spending, but government spending continues to increase. There are plans for extra stimulus budget, but this is worrying as it can renew recession and deflation. On issues of governance, the Democrats in power in their bid to transfer policy making from bureaucrats to politicians have caused rifts in the cabinet. The Democrats need to win to their side some tiny parties if they are to pass any legislation. The delays in the resolution of Futenna Marine Base problem with the U.S could make the relations between the two countries sour, resulting in the loss of major Japanese export market. The Bank of Japan (BOJ) is facing pressure from cabinet ministers who fear that if the bank withdraws from emergency steps to foster corporate funding the economy which is slightly in balance may topple. If deflation persists BOJ will be pressured to purchase more government bonds. The Finance minister has argued that the Yen should be manipulated contrary to economic fundamentals which would make the Yen strong to cut down over dependence on exports, Yen intervention is likely to occur if the currency moves too far. The funding of scandals has cast doubts on the government. Dissent is increasing over this issue and the Prime Minister may be forced to resign if the scandals continue. This occurrence may throw the country into disarray (Marshall  Rodney, 2010, par.1-6). On the other hand the according to the Eurasia Group (2010, p.1) Russias ability to withstand both external and internal shocks stands at 63 points, below the 80 point mark of highly stable countries. The relatively unstable state of Russia is due to its war with Georgia which saw a massive withdrawal of investments from the country. In 2008 its Foreign exchange reserves dropped by 16.4 billion in a week (from August 8 to 15). Though the Georgian conflict did not adversely affect the economy it exposed Russias vulnerabilities. Indeed central Asian states are skeptical of the troubled gas routes to the West that bypass Russia.

Under What Circumstances Might a Country Devalue
In a particular country, when the interaction between the policy decisions and the market forces make it untenable the currencys fixed exchange rate, it becomes inevitable for that particular government to devalue its currency (Raimond  Shohreh (n.d). It follows that in order to ensure sustenance of fixed exchange rate by a particular country, then that particular country need to have sufficient reserves in foreign exchange mostly in form of Dollars and still be willing and able to spend the same in purchasing of various offers of its currency at the prevailing exchange rate. To this end therefore, when a country is not willing or is unable to do so, then it resorts into currency devaluation to such a level capable of supporting its foreign exchange reserves.

What are the possible implications of currency devaluation
The implication of the Devaluation of a particular countrys currency is two fold. Since it makes the currency of that particular country cheaper, then it follows that devaluation will make that countrys export relatively cheaper for other countries (Raimond  Shohreh (n.d).On the other hand, imports from other countries will be discouraged owing to the fact that products from foreign countries will be made relatively more expensive for domestic consumers. This as a result will decrease the imports of that particular country while increasing its export thereby reducing the current account deficit (David, 2002, p. 23).

Relationship between Interest rate and the value of currency
In economics, when the countrys interest rate increases, the value of currency of that country tends to increase in value. This is mainly based on the fact that when interest rate of that particular country goes up, due to the increased rate of return from investments foreign investors are attracted causing the demand for domestic currency to increase in value. On the other hand, when it happens otherwise, (devalues), that countrys export become cheaper relative to foreign countries while imports become more expensive. This as a result reduces the overall aggregate demand with resultant reduced employment (Stephen  Agnes, 2009, p. 124).

The case of Russia
For the case of Russia, there is need to devalue its currency as a policy tool to stimulate fledgling export by relieving the unfavorable balance of trade. From the case scenario, Russia has a high interest rate and as well as inflation rate and with zero rates of unemployment it means that in Russia the aggregate demand is high which may result to a further inflation rate.  Comparatively, the balance of trade for both Japan and Russia is favorable as indicated by the level of current account balance however, for Russia the situation is relatively better as opposed to Japan. This means therefore, the exports in Russia are more favorable and attractive to foreign countries relative to imports, (Stephen  Agnes, 2009, p. 16). This means that weakening the currency exchange rate will make its export prices to rise which will allow it to remain competitive in the short term and more competitive in the long run. This will have a positive implication for the country Russia as well as to the mother company, GHWB Manufacturing Plc, because it will mean that by Russia remaining more competitive while still getting paid less for every export, it will not only benefit from selling more in order goods to earn as much as they did before, but will have an added advantage of utilizing the opportunity fully to sell more by remaining competitive (Halit, 2001, p. 71).

In reference to Raimond  Shohreh (n.d) for the GHWB Manufacturing Plc, there will be increased economic strength, balance of payments surplus and profit potentials. Hence with currency devaluation, Russia will be able to adjust the exchange rate, reduce the prices of exports so as to remain competitive in the markets with a resultant massive selling and hence potential increase in total profits. On the other hand, since devaluation of currency means that reduced liabilities and especially with debtor countries, then it means than this MNC will be privileged to service its loans cheaply (Stephen  Agnes, 2009, p. 71).

Revaluation
Currency revaluation is defined as the calculated adjustment to a countrys exchange rate with respect to a selected baseline like foreign exchange wage rate among other parameters. Unlike in currency devaluation where the direct cost is borne by the government, the price of currency revaluation is normally paid by the exporters of that country. Based on this therefore, it follows that speculative devaluation are government misfortunes while speculative revaluation mainly concerns the financial risk managers. From the given scenarios in order for Japan to realize sustainability in the growth and development of its economy which will then help the country to integrate efficiently with the global financial markets, then it will be needed to increase the value of its currency, increase interest rate and reduce the rate of unemployment. This will be achieved through currency adoption of market-driven as well as flexible currency, (Nerijus, 2008, p. 9).

    In order for Japan to lift capital controls and untether its currency, it will be needed to raise the interest rates geared towards stemming the capital outflow, cool the credit boom and investment without derailing growth. By adopting currency revaluation strategies which will be inflationary in nature as it will make Japanese goods more expensive which will ultimately boost the financial transactions with GHWB Manufacturing Plc. From the case scenario, since Japan has a relatively low employment rate, low interest rate, it follows that there is need to revalue its currency exchange aimed at increasing the aggregate demand to realize full employment and higher favorable balance of trade (Stephen  Agnes, 2009, p. 36).

Implication of revaluation policies on GHWB Manufacturing Plc

Following the above discussion, it means that if the GHWB Manufacturing Plc. Decides to invest in Russia, devaluation of the currency exchange will have such implications like.
Increased export devalued currency against a counter foreign currency will boost the performance, profit and revenue by highly encouraging domestic firms to export in return of foreign currency. On the other hand, foreigners will increase their demands for the domestically produced goods (Nerijus, 2008, p. 9).

Discourage importation since devaluation will result to a low value of the domestic currency, then domestic firms will not be able to make higher imports. This as a result will mean reduced competitions between domestic firms and the foreign one hence increased freeness in their operations as well as increased profits (Stephen  Agnes, 2009, p. 11).

Increased foreign currency reserve GHWB Manufacturing Plc will benefit from increased foreign currency reserve following increased export above imports. This will ensure its wellness in currency exchange business (David, 2002, p. 12).

Revaluation on the other hand which will reduce competitiveness and increase the flexibility of currency exchange will have a negative impact on increased and heightened uncertainties and particularly in cross-border economic operations following increased investment and rising prices of corporate goods (Khoury  Chan , 1988, p.3). On positive aspect, revaluation will help in reducing import prices enhance purchasing power which will ultimately help in curbing inflation. However, as Sohnke (2006) notes, revaluation need to be executed at a moderate pace since a sudden and large revaluation may result to hurting both direct investment and exports that it can help consumption.