Question

Gentry Inc. is a mid-sized tech firm (200 employees and $300 million in revenue) and has been privately held since the firm’s inception ten years ago. The organization’s board of directors is keen on expanding the operations globally to take advantage of a growing market. Based on reports from the research and development team, the organization can increase its profitability metrics by 15 to 25% if it expands the operations to China, Japan, and Germany. Becoming a multinational organization will not be easy. To finance this expansion, the board of directors has decided to take the organization public and issue some bonds to raise an additional $50 million. The research team has already determined that the organization meets the financial requirements outlined by the Securities Exchange Commission. The goal is to maximize the Initial Public Offering (IPO), and the leadership must efficiently manage the capital, measure the risk of the investments, and ensure the financial metrics are robust relative to similarly sized organizations.

Determine how each of the following risk exposures affects the international expansion of Gentry.

1. Transaction risk

2. Translation risk

3. Economic risk

Include how you would use sensitivity and scenario analysis to make your recommendation. Spell out the advantages and disadvantages of each method.

Answer 1

1. Transaction risk means the foreign exchange risk. If the company has to deal in their home currency, then there is a risk of home currency being devalued during purchases and home currency being overvalued during sales.

2. Translation risk

Translation risk is the risk that the assets lying in foreign countries being sold at a lower price due to foreign currency being devalued for example If Company A has a subsidiary in Foreign country and if the subsidiary closes, then while selling the subsidiary there is a risk that the sale proceeds may be lower than assets invested value initially.

3. Economic risk

Economic risk is the risk that there will be political instability, strict government regulation etc. which will affect the performance of the company in foreign country. Usually before setting up a foreign company a detailed analysis is done to find out the environmental stability. Example:- The government may ban manufacturing of items sold by the company hence then the company would suffer a huge setback

Include how you would use sensitivity and scenario analysis to make your recommendation. Spell out the advantages and disadvantages of each method

1. Hedging

The company can do hedging of its transactions so that it reduce or negates the probable losses

Advantage:- The hedging reduces the risk

Disadvantage:- The company may have to pay premium for hedging its transaction and sometimes the risk may not be reduced fully only to some extent

2. Analysis of the external environment prior to investing in foreign country

The company should undertake thorough analysis of the external environment like political, regional etc prior to investing outside so that it does not have to incur losses in future

Advantage: Economic risk is reduced

Disadvantage:- Huge costs involved in research