1.Why did Swatch Group CEO Nick Hayek Jr. have such a strong reaction to the action of the SNB proclaiming that "Jordan is not only the name of the SNB president, but also a river and today's SNB action is a tsunami"?

2. Explain the difference between the nominal and real exchange rate. Use the excel file accompanying this case to assess the effects of the following scenarios on the stock price of Swatch Group (see picture):

(a) A permanent 10% appreciation of the Swiss franc beginning in 2015.

(b) A permanent 10% appreciation of the Swiss franc beginning in 2015 along with 10% foreign (all other countries) inflation in 2015 (and zero inflation thereafter).

(c) A permanent 10% appreciation of the Swiss franc beginning in 2015 along with 9.1% Swiss deflation in 2015 (and zero inflation thereafter).

(d) No change in the value of the Swiss franc, but 9.1% Swiss deflation in 2015 (and zero inflation thereafter). Based on your calculations above discuss the importance of changes in the nominal and real exchange rate of the Swiss franc on Swatch's stock price.

3. Why did the SNB adopt the ceiling policy in the first place?

4. Use a supply-and-demand diagram of the foreign exchange market for the Swiss franc vs the Euro to explain the policy pursued by the SNB to maintain the ceiling. What was the result of this policy on the Swiss monetary base and money supply?

5. Why do you think the SNB ended the ceiling policy?

Inputs 2015 2016 2017 2018 2019 Long-term Assumptions Notes Swiss Inflation Real Revenue and Cost Growth Foreign Inflation 0 0 0 0.054 Assumption, based on recent salescost numbers in case [Ex 7) O Long-run FCF Growth Rate 0.031 Assumption Cumulative Appreciation (vs. 2014) O 0 Swiss Sales Fraction 0.1 From case [Ex 6) Swiss Costs Fraction 0.5 Assumption, reasonable given personnel breakdown given in case (p. 4) ANWO/Revenue 0.052 Assumption, based on recent cost numbers [Ex 7) Model (millions of CHE] APP&E/Revenue 0.051 Assumption, based on recent cost numbers [Ex 7) 2014 2015 2016 2017 2018 2019 Steady-State Amortization Revenue 0.003 Assumption, based on recent cost numbers [Ex 11) Swiss Revenue 395 944 995 1048 1105 165 Tax/EBIT 0.2 From case (Ex 7] Foreign Revenue (constant CHF) 8059 8494 395 9436 9945 10482 Real Discount Rate (WACC) 0.062 Assumption Foreign Revenue (actual CHF] 8059 8494 8952 9436 3945 10482 2014 Non-Current Liabilities 765 Millions of CHH, from case (Ex 7) Total Revenue 3954 3438 9947 10484 11050 11647 11647 2014 Revenues 3954 Millions of CHF. from case [Ex 7) 2014 Costs 7188 Millions of CHF, from case [Ex 7) Swiss Costs 3594 3788 3993 4208 4435 4675 Number of Bearer Shares (UHF 80.3 Millions, from 2014 Swatch financial statement Foreign Costs [ constant CHF] 1594 3788 668 4208 4435 4675 Bearer Share Equity Fraction 0.8 From 2014 Swatch financial statement Foreign Costs (actual CHF) 359 3788 3993 4208 4435 4675 Total Costs (including depreciation 7188 7576 7985 8416 8871 9350 1350 Results Total Present Value of FCF 18131 EBIT 1861 1962 2068 2179 2297 2297 Value of Equity 17366 NOPAT 1489 1570 1654 1744 1838: 1838 Bearer Share Price (UHP) 459 ANWC 491 517 545 575 606 606 APP&E 481 507 535 564 594 594 FCF (NOPAT - ANWC - APP&E + Amortization 545 575 606 639 673 673 Terminal Value 21077 Discount Rate 0.062 0. 128 0. 198 0.272 0.351 0.35 PV of FCF 514 510 506 502 498 15602