FIN534_10_2_Don-1: Good day, everyone. This is a big day for the company; we will find out if we will be expanding out west or not!

Joe is meeting with the Board of Directors about the expansion project. He is reviewing all of the information that you have thoroughly analyzed.

FIN534_10_2_Don-2: When you think about it, you have done several analyses in such a small time window. We really pushed you and the results have been impeccable! We are presenting a good case for expansion but the Board is cash conscious so I am not sure how they are going to vote. I like to think that the C in TFC is for Cash and not Center.

FIN534_10_2_Linda-1: Don, we have really learned a lot about TFC over this time as well. One thing for sure is there is a lot of analysis that goes into a project no matter the size. I cant even imagine what it would be like if we decided to expand internationally?

FIN534_10_2_Don-3: That is interesting that you should mention international expansion as TFC has that in its long term planning.

So, as we wait for a decision to be made on the west coast expansion project, we would like you to look at one more area of consideration. This area includes the international monetary system including exchange rates. This is only in the discussion phase, so dont worry about completing another full analysis like we did with the expansion project. This is only for information gathering. I bet you are happy to hear that!

FIN534_10_3_Linda-1: Thanks, Don. I remember my international finance course at Strayer University. We learned about the factors that influence trade and capital flows and the economic variables that influence exchange rate movements.

FIN534_10_3_Linda-2: Money is considered a medium of exchange and every nation has some form of monetary system in place. We use the dollar as our means of exchange. In many countries in Europe the Euro is used. And in Japan there is the Yen. Whereas Hong Kong has the Hong Kong dollar.

It is important for one to know the exchange rates and how each countrys monetary system works, as that may contribute to additional risk by a company when dealing internationally.

FIN534_10_3_Linda-3: Lets get back to the United States. In the U.S., the Federal Reserve is the monetary authority. Its prime responsibility is to try to have the economy grow while keeping inflation in check.

But when it comes to trading between nations with different currencies, the international monetary system is used in determining how companies in different nations can exchange with another.

Lets look at some exchange rate systems over time.

FIN534_10_4_Linda-1: The first system was called the Fixed Exchange Rate System. With this system, non U.S. currencies were tied to the U.S. dollar. The U.S. dollar was tied to gold at thirty five dollars an ounce. During this time, the United States would try to ensure that the price of gold would stay at thirty five dollars an ounce, hence keeping it fixed, while other countries used these monetary policies to keep their exchange rates within reason of the United States. It is also used to control inflation.

FIN534_10_4_Linda-2: This might sound like a good system but there were flaws. Mainly the reasons for spikes or drops in the economy were not being addressed. For example, if the demand for the Hong Kong dollar was high, steps would be taken by Hong Kong to put more Hong Kong dollars into the economy.

FIN534_10_4_Linda-3: With this system, countries would basically fabricate the supply and demand system instead of looking at the real reasons behind the rise or fall in currency prices. As you probably guessed, a system like this one didnt last too long.

FIN534_10_5_Linda-1: Another system is called the Floating Exchange Rates; it is also called the fluctuating exchange rate. With this system, the prices of currency for countries are based on supply and demand in regard to international trade and investing. So, the exchange rates float as supply and demand varies.

FIN534_10_5_Linda-2: With the Floating Exchange Rate system, domestic currency can appreciate or depreciate against foreign currency. This fluctuation produces an exchange rate risk.

FIN534_10_5_Linda-3: Another system is the Managed Floating Rate system. With this system, there is a lot of government involvement in controlling a countrys exchange rate by managing the supply and demand for the country.

FIN534_10_5_Linda-4: And a fourth system is a Pegged Exchange Rate system. Under this system, a countrys currency exchange rate follows the currency of another country or a conglomerate of country currencies. However, if the exchange rate for a country starts to vary too much from what the pegged countrys established, the countrys government may become highly involved to ensure the currency exchange rate is back on track.

He said he is still in the board meeting and would like us to continue with our international analysis and focus on the exchange rate risks. He also is hoping for a decision by the board soon regarding the expansion proposal.

FIN534_10_7_Linda-1: While I was hoping for a quick decision, the good news is they are still discussing the expansion. Let us take a look at Exchange Rate Risk.

As we all know, not every country uses the same currency. Due to this, there can be fluctuations in prices paid or received through exports and imports. Companies need to consider this when dealing with other currencies. What they paid for an item the first time it may not be the same the second time if the exchange rate differs.

Lets look at an example.

IN534_10_8_Linda-1: Lets assume you are dealing with a company that has the Euro as its currency. Note the Euro is the basic unit of currency among participating European Union countries. The rate today is that one U.S. Dollar can buy point seven-four-one-four Euros. So, if TFC was going to buy something that cost ten thousand Euros, it would cost TFC, in U.S. dollars, thirteen thousand four hundred eighty seven dollars. That is because each U.S. Dollar can only be exchanged for point seven-four-one-four Euros.

FIN534_10_8_Linda-2: Looking at it mathematically, we can set up the rate of the two currencies. Look at the formula on the board and notice that we are looking for U.S. Dollars. We can do the same if we were exchanging for Euros instead of U.S. dollars.

IN534_10_9_Linda-1: With the example you can see what is needed under each countrys currency. But where is the risk? That comes from the currency rates. The rate from our example was

one U.S. Dollar can buy point seven-four-one-four Euros. What if the exchange rate was one U.S. Dollar can buy point six-five-two-four Euros? Assuming the same ten thousand Euros, it would cost TFC, in U.S. dollars, fifteen thousand three hundred twenty eight. That is because each U.S. Dollar can only be exchanged for point six-five-two-four Euros. That is where the risk is. If we waited for a better rate with the international country and it never happened, as in our case it got worse, the money paid out would be greater. That is why timing is important when dealing with foreign currencies.

FIN534_10_9_Linda-2: Let us go even further. What if the rate was one U.S. Dollar can buy point eight six seven three Euros? Assuming the same ten thousand Euros, it would cost TFC, in U.S. dollars, eleven thousand five hundred thirty. That is because each U.S. Dollar can be exchanged for a better rate of point eight six seven three Euros.

FIN534_10_9_Linda-3: With the above in mind, can you look at a few more exchange rates while I check on the progress of the board meeting?

FIN534_10_11_Linda-1: Great work. When companies are looking at doing business internationally exchange rate risk is one area that needs to be considered. Your analysis will provide a strong basis as TFC explores this area further.

We also learned that international expansion comes with risk and timing can save or cost a company a lot of money. We also learned that there are different types of exchange rate systems and companies need to understand what each country is following when doing business.

FIN534_10_11_Linda-2: Linda speaking. Hi! Okay, Don. Thanks. We will stay right here and wait for you to join us with Joe. See you in a little bit.

FIN534_10_11_Linda-3: That was Don on the phone. He said the Board reached a decision and he wanted to break the news to us in person. I wonder what they decided?

IN534_10_12_Don-1: Thanks for meeting with Joe and myself on short notice. As you know, Joe has been meeting with the board and presenting them all of your analyses regarding the expansion. It is great that we have such a dedicated board. They really have taken an interest in this expansion project as the scope is unprecedented for TFCs standards.

FIN534_10_12_Joe-1: I am sorry, Don, but I cant wait to tell everyone the news. The Board APPROVED the expansion project!!! They were very pleased with all of your hard work and said it was due to your detailed analyses that they decided to approve the project. Congratulations and great job everyone!

I am so proud of the work that you all did on the project. It was a total team effort.

FIN534_10_12_Joe-2: There is even more good news!

The Board has decided to offer Linda a position as the Director of Overall Operations which is a promotion to Vice-President in TFCs structure.

Our Board also wants us to commend Strayer University for providing us with a top MBA student. And in doing so, the board doesnt want to lose you. At this time, TFC would like to extend you an offer to join our management team as the Manager of the New West Coast Operations, where you will be reporting to Linda. With Lindas new role, she will need someone with your expertise to manage this expansion venture and help make this project successful.

FIN534_10_13_Linda-1: You did it! Great job. You did so much analyzing, calculating, and decision making in such a short amount of time. And in each instance your work was top notch. During our time together, you analyzed financial statements, performed ratio analysis and time value of money situations, valued bonds, stock prices, and the costs of capital at TFC. You also looked at capital budgeting, cash flow, financial planning and agency conflicts. Furthermore, you analyzed TFCs dividend policy and exchange rate risks.

FIN534_10_13_Linda-2: Again, congratulations on performing at the highest level and being the main reason we are moving forward with this expansion project. Without you, this expansion probably would not have happened. To keep the TFC tradition going, I think a workout is in order to celebrate your accomplishments.

From the scenario, select two (2) potential international markets in which TFC may wish to do business. Compare the currency markets of the two (2) countries you have chosen with that of the U.S. dollar. Based on currency considerations only, recommend whether or not TFC should expand to the international markets that you have chosen.