Risk Management

Running head: RISK MANAGEMENT
Risk Management
Name of the Student:
Name of the University:
Authors Note:

RISK MANAGEMENT
Executive summary
The overall assessment aims in evaluating the project that has been presented to the
American company, which produces body care products. The project relatively evaluates the
opportunity for the American based organisation in South America. The Pretty Face
organisation can adequately invest in Brazil and create a subsidiary in the region to
accumulate high level of revenues in the long run. The analysis has also been provided on
the debt option, which can be used by the organisation to improve its return. The analysis
directly indicated that using the loan in Brazil would be more beneficial Endeavour for the
organisation, as it will reduce the cash outflows US bank. Moreover, the equity issue need to
be conducted in United States, as it would allow the parent company to acquire the
required funds without any hassle and support the overall project in Brazil. The impact of
financial crisis is relatively problematic for all the organisations engulfed in operations.
Therefore, reduction in overall expenses would be more beneficial for the Organisation in
Brazil during the financial crisis as revenues and cash flow would be declining due to the
capital market meltdown.
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RISK MANAGEMENT
Table of contents
1. Introduction...................................................................................................................................4
2. Depicting the annual cash flows in BRL that would be remitted to United States.........................4
3. Calculating the annual cash flow that Pretty face receive.............................................................5
3.1 Cash flow when subsidiary hedges BRL$8 million annual........................................................5
3.2 Cash flow when no revenue is hedged....................................................................................6
4. Identifying the best option for Pretty face.....................................................................................7
4.1 Using the debt from US............................................................................................................7
4.2 Using the debt from BRL..........................................................................................................8
5. Elaborating on the factors that is driving the difference between issuing the share in US and
Issuing shares in BRL..........................................................................................................................8
6. Identifying the problems that would be faced by the organisation in BRL and the impact on the
BRL/USD..........................................................................................................................................10
7. Conclusion...................................................................................................................................11
References and Bibliography...........................................................................................................12
Appendix 1 – [Cash Flow with USD Loan]........................................................................................14
Appendix 2 – [Cash Flow with BRL Loan].........................................................................................17
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RISK MANAGEMENT
1. Introduction
The overall assessment aims in evaluating the project that has been presented to the
American company, which produces body care products. The project relatively evaluates the
opportunity for the American based organisation in South America. The Pretty Face
organisation can adequately invest in Brazil and create a subsidiary in the region to
accumulate high level of revenues in the long run. Moreover, the proposed project is
evaluated on the basis of currency exchange rate, loans, and other factors which need to be
understood by the management before commencing the Investments. Further evaluation
has been conducted on the possibility of fearful outcomes that might incur due to the
occurrence of a financial crisis.
2. Depicting the annual cash flows in BRL that would be remitted to United States
0 1 2 3 4 5
Demand 1,400,000.00 1,400,000.00 1,400,000.00 1,400,000.00 1,400,000.00
Price per unit 18.00 19.08 20.22 21.44 22.72
Total revenue (1 x 2) 25,200,000.00 26,712,000.00 28,314,720.00 30,013,603.20 31,814,419.39
Variable cost per unit 8.00 8.48 8.99 9.53 10.10
Total variable cost (1x4) 11,200,000.00 11,872,000.00 12,584,320.00 13,339,379.20 14,139,741.95
Annual lease expenses - - - - -
Other fixed costs 2,000,000.00 2,120,000.00 2,247,200.00 2,382,032.00 2,524,953.92
Noncash expenses (depreciation) 10,800,000.00 10,800,000.00 10,800,000.00 10,800,000.00 10,800,000.00
BRL interest expenses 2,940,000.00 2,940,000.00 2,940,000.00 2,940,000.00 2,940,000.00
Total expenses (5+6+7+8+9) 26,940,000.00 27,732,000.00 28,571,520.00 29,461,411.20 30,404,695.87
Before-tax earnings of subsidiary (3 - 10) 1,740,000.00- 1,020,000.00- 256,800.00- 552,192.00 1,409,723.52
Host government (BR) corporate tax - - - 138,048.00 352,430.88
Principal payment on BR debt - - - - 42,000,000.00
After-tax earnings of subsidiary (11 -12-13) 1,740,000.00- 1,020,000.00- 256,800.00- 414,144.00 40,942,707.36-
Net cash flow to subsidiary (14 + 8) 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 30,142,707.36-
BRL to be remitt ed by subsidiary 9,060,000.00 9,780,000.00 10,543,200.00 11,352,192.00 12,209,723.52
BRL acc. by reinvesting blocked funds - - - - 6,000,000.00
Withholding tax on remitt ed funds - - - 138,048.00 352,430.88
BRL to be remitt ed after witholding taxes 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 17,857,292.64
Salvage value - - - - 43,200,000.00
Capital gain taxes - - - - -
BRL to be remitt ed after capital gain taxes 9,060,000.00 9,780,000.00 10,543,200.00 11,214,144.00 61,057,292.64
Expected spot rate of BRL - - - - -
PV of parent cash flows 8,388,888.89 8,384,773.66 8,369,532.08 8,242,730.61 41,554,567.43
Initial investment by parent 42,000,000.00-
Cumulative NPV 42,000,000.00- 33,611,111.11- 25,226,337.45- 16,856,805.37- 8,614,074.75- 32,940,492.68
NPV 32,940,492.68
Year
The above table provides information regarding the overall cash flow of the
subsidiary company in Brazil over the period of 5 years. The table directly indicates that the
project would have a positive NPV value after conducting all the relevant expenses and
incomes over a period of time. After evaluating the relevant information such as Salvage
value, total income, total expenses and withholding tax remitted funds, the actual cash flow
of the subsidiary during the period of 5 years can be identified. This calculation has directly
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