Investment Decision in Placard vs Birdies

The assignment presents an investment decision for BigS, considering options between Placard and Birdies. It discusses the benefits of investing in Placard, such as technological change and lower inflation in the UK. The analysis also touches on financial derivatives and interest rates, recommending Placard as a better investment option due to its potential for higher returns despite being riskier.

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Paper Title:
Name of Student: xyz
Institution Affiliation: xyz

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Introduction
This report is about the BigS, a manufacturer of stereos in New Zealand. Most of its main parts
that are used for assembling a stereo are imported from Canada. Recently the rate of Zealand
dollar is depreciated against the dollar rate of Canada. This depreciation has increased the
production cost for the company. In the phase of globalization, BigS is facing a tough
competition from foreign companies that are into the same field and running their business in
New Zealand. All these circumstances have increased the problems for the BigS organization
many times. The revenues of organizations have fallen down to an extent of 15%. Further, the
return on investment of the organization has seen an enormous low of 6%. In this report, we will
discuss the two other organizations namely Birdies and Placard that whether the BigS
organization should invest in Birdies or Placard and what long-term benefits BigS will receive in
future after investing in one of these organizations. Birdies are operating its business in country
A and are enjoying a situation of monopoly in its business they are into the same business of
producing or manufacturing stereos, whereas Placard is operating its business in Europe and has
yielded an average return on investment of 17% in the last 3years. The Placard is into the
business of manufacturing gaming headsets.
Diversification Analysis
Diversification is a tool or a strategy that is used by big or medium scale business organizations
to expand or to bring new technology into the existing business. In this report, we are going to
make a diversification analysis of the opportunities and the risk that will come along with this
diversification if organization BigS choose to invest in Birdies or Placard. Now if we talk about
Birdies then it is very clear that the organization would yield a maximum return on investment of
around 9% and that too in 5 years, and this organization is enjoying a monopoly position in its
country that means they have no close competition in their line of business and if BigS decides to
invest in Birdies then it will directly double the benefits of the BigS organization. Any business
organization in this world desires to grow more and more, and diversification is one out of the
four strategies to expand the business of a business organization. Below is the table that shows
the four strategies of expanding business (Mejía 2011):
Market Penetration Product Development
Market Development Diversification

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While three of the mentioned strategies are somewhat related to each other, then there is
diversification that means entering a business organization into a different market or acquiring a
business organization (Bookbinder 2016). Now coming back to the situation, BigS that used to
earn a good amount of revenues is now suffering because of the change in the dollars rates of
New Zealand and Canada, and because of the international competitors. Now, BigS have two
options whether to invest 40% in Birdies or to invest the same amount in Placard. Now we will
discuss the opportunities or the risk that would come along with the investment in Birdies (Bogle
2015).
Birdies
Birdie’s is also a producer of stereos in country A. Birdies is not operating its business on a large
scale like BigS but they are enjoying a monopoly position in this market in their country.
Country A is imposing high-interest rates in order to curb inflation. If in case BigS go with
option A, then it will not really increase benefits of the BigS, as the interest rates are higher,
income is low in country A, the expected return on investment that BigS will get is around 7%.
There are no chances of any change in the monetary policy in the near future that means BigS
have to face the interest rate of 10%. The risks that will come along with this diversification are
as under (Kenny 2014):
 Low income and high rate of interest will worsen the situation at the BigS, as it is already
suffering from the increase in operational costs and 15% decrease in the revenues.
 Birdies are operating their business in a country where income is low which ultimately
means they are using poor technology, hence another risk is shifting from high to low
technology will again put them into worse condition (Elseiver 2018).
 Another risk that would entail with this investment is that the foreign competitors will
take the show away while BigS will be busy setting up in Country A.
Placard
Now talking about Placard, it is a business organization that manufactures gaming headsets and
is using technology that would prove out to be very new for BigS. Placard and BigS are
somehow into a related business. Now if BigS decides to invest in Placard which only conducts
its business in Europe then it will prove out to be very profitable for BigS as the interest rates
that Placard is currently imposed is only 0.5%, it may be reverted to its previous state if the
inflation goes beyond the level of 1%. The Placard is using high technology and if BigS decides
to take over its business then BigS may experience an increase of 7% on the return on
investment. Placard case is riskier than that of Birdies. However, the risks include are, as under:
 Placard business has high risk i.e. 13% standard deviation.
 Interest rates may get an increase in Europe.
 Competition is very extreme in their market, BigS may or may not be able to handle.

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Change in Inflation, Interest Rate, and Exchange Rate
Investment in Birdies
If BigS makes an investment in Birdies, then the change in the inflation rate, interest rate, and
exchange rates would have the following effects on the investment:
 If there is an increase in the inflation rate in country A, where birdies are operating its
business then it will directly increase the interest rate, which will result in lower revenues
and higher interests for BigS.
 Suppose if the exchange rates fall then it will make the things cheaper in country A that
means BigS will have access to cheaper resources but it also means that they will earn a
low income.
Investment in Placard
If BigS makes an investment in Placard, then following will be the results of the changes in
inflation, interest and exchange rate:
 If there is an increase or decrease in the inflation rate, then it will not harm the revenue of
BigS in Europe is comparatively lower than that of Country A.
 Exchange rates would affect the BigS organization, the currency of Europe is a pound
and BigS deals in dollars, so BigS will have to bring more capital if the exchange rate
increases.
 Interest rates are as low as 0.5% in Placard country, so little change whether increases or
decrease will not going to harm BigS.
Two Scenarios “Pessimistic and Optimistic”
Optimistic “Birdies”
Birdies is a business organization operating its business in country A. Birdies is enjoying a
position of monopoly in their country and have an access to cheap labor. Below are given the
results according to the Optimistic view, if BigS makes an investment in Birdies:
 The operational cost of BigS will be reduced to a great extent as the labor cost in country
A is comparatively cheaper.
 BigS will be enjoying double benefits as they will be able to shift resources (labor,
machinery) from country A to their original country i.e. New Zealand.

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 The income of BigS will be doubled or maybe tripled, in case of rising in the prices of
oil, as the economy of a country is dependent mainly on the global prices of its
commodity.
Pessimistic “Birdies”
Now if we take up a pessimistic view and then the results would be as under:
 Due to higher interest rates and inflation rate, revenues are going down to an
unbelievable low.
 A decrease in the oil prices will further decrease the income level in the country, which
means that BigS will have low income.
 Cheap labor means less productive and less trained labor that will again result in the loss
of BigS.
Optimistic “Placard”
The Placard is a manufacturer of gaming headset in Europe. The competition in their field is very
aggressive; however, they have a good technology. In addition to this, the interest and inflation
rates are very low in the country that Placard is operating its business in. Below will the
optimistic scenario:
 Lower interest and inflation rates will let BigS earn a good income, as lower interest and
inflation rate will be an opportunity to earn more.
 High technology will allow BigS to produce high tech stereos on their own price.
 Labor in Europe will be trained and highly productive, this will further reduce the
operational cost and increase the revenues of the BigS.
Pessimistic “Placard”
The Pessimistic scenario will produce the following results:
 The political uncertainty in Europe can bring the country on its knees, which will result in
recession or inflation, which means that BigS will face loss.
 Fierce competition is faced by Placard, which ultimately means that the first step would
be to take care of the competition.
 The severe risk may totally put an end on the revenue of the BigS, as Placard is not only
facing the risk of competition but also the risk of increased inflation or interest rates and
the risk of the political uncertainty.
Financial Derivatives

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In this section, we are going to discuss the risks to which BigS would be exposed if they decide
to expand their business with either Birdie's or with Placard. The risks that the organization BigS
would be exposed to are as under:
 In case, BigS decides to expand its business by investing in Placard, a European gaming
headset manufacturer then the first or the major risk that will come into the way of BigS
is the risk of the political uncertainty. Political instability effects the investment in an
adverse manner (Ababa 2014). Suppose the current governments implies 2% tax on the
income of the business and a new government come into power and increase this tax by
8% then this will directly harm the revenues of the business.
 Now if BigS decides to make an investment in Birdies then again the risk of earning low
income will come in the way of BigS. Country A where birdies are operating its business
is a low-income country which means that even if BigS successfully earn money from
birdies then also their revenues will remain low.
 The High rate of interest and inflation in country A is another risk to the revenues of the
BigS. There is no point of operating a business in a country where the interest and
inflation rates are high. More the inflation in a country less will be the spending power of
a consumer of that country (Sylla 2015).
 Fierce competition in Europe is faced by Placard, now if BigS makes an investment in
Placard then not only the risk of change in interest rates, exchange rates or political
uncertainty but the fierce competition will affect the investment of the BigS (Pillow
2013).
BigS if decide to make an investment if any of the mentioned business organization then to cover
these risks mentioned above, BigS can make a contract (Financial Derivative) with either of the
firm and then this contract can be used as a hedge against the risks that BigS is exposed to
(Gupta 2015). The contract can contain the following conditions (Vashishtha 2010):
 Commodity Risk: In this type of financial derivative, the supplier and the buyer comes
into a contract in present for a future date that if in case the price of a commodity or a raw
material increases then the supplier will supply that commodity on the present rate and
not on the increased rate. This can be used for the case of Birdies and Placard both
(Vahey 2014).
 Interest Risk: If in a case due to political uncertainty the change in interest makes the
company unable to pay the interest then this financial derivative can be used as a hedge
against this risk (EduPristine 2015).
Recommendations
In this section, few recommendations are provided for BigS to follow for the investment purpose.
BigS should invest in Placard as BigS is in more need of technological change rather than

BigS STEREOS MANUFACTURER
earning revenues. Once BigS gets its hands on new technology they can manufacture different
stereos that will allow them to charge prices more than what they were charging till date.
Moreover, BigS is and Placard are almost into the same business the only difference is one is
producing the stereos while the other is producing the gaming headsets both are related to the
sound. Another benefit that could be enjoyed by BigS is the lower rate of inflation and interest in
the UK. Less inflation means more spending power and low-interest rates mean more income
(Daniela Viorica 2014), if we consider all these points with that of Birdies then Birdies stands
nowhere close to the investment proposal of Placard. There is no doubt that investment in
Placard is riskier but that is also true that more the risk the better will be the outcome (Vukovic
2016). So BigS is recommended to invest in Placard rather than going for Birdies.
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BigS STEREOS MANUFACTURER
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