Finance Question

Pepa Company, the U.S.-based firm with Brazilian subsidiary, is engaged in production and sales of face masks for medical use. The financial controller of Pepa Company estimates future cash flow of the whole company in coming years: Year 2 Year 3 (In thousands) Year 1 Sales U.S. US$300 Brazil BRL1,000 Costs of Materials and Operating Expenses U.S. US$200 Brazil BRL200 US$350 BRL1,200 US$420 BRL1,250 US$280 BRL300 US$300 BRL1,500 US$0.24 US$0.26 US$0.28 Expected exchange rate of Brazilian real (BRL) at the end of each year (USD/BRL) Pepa Company is considering explore Chile market. (i) Identify ONE advantage and ONE disadvantage of international trade over franchising. (2 marks) (ii) In order to minimize operation risk, no production facilities will be set up in Chile. Identify and explain TWO approaches how Pepa Company uses currency derivatives to hedge exchange rate risk without substantial hedging risk. (4 marks) (iii) Compare TWO differences between the two measures identified in (e)(ii). (4 marks) Pepa Company, the U.S.-based firm with Brazilian subsidiary, is engaged in production and sales of face masks for medical use. The financial controller of Pepa Company estimates future cash flow of the whole company in coming years: Year 2 Year 3 (In thousands) Year 1 Sales U.S. US$300 Brazil BRL1,000 Costs of Materials and Operating Expenses U.S. US$200 Brazil BRL200 US$350 BRL1,200 US$420 BRL1,250 US$280 BRL300 US$300 BRL1,500 US$0.24 US$0.26 US$0.28 Expected exchange rate of Brazilian real (BRL) at the end of each year (USD/BRL) Pepa Company is considering explore Chile market. (i) Identify ONE advantage and ONE disadvantage of international trade over franchising. (2 marks) (ii) In order to minimize operation risk, no production facilities will be set up in Chile. Identify and explain TWO approaches how Pepa Company uses currency derivatives to hedge exchange rate risk without substantial hedging risk. (4 marks) (iii) Compare TWO differences between the two measures identified in (e)(ii). (4 marks)