Question 14 10 pts BYD Auto is a leading new energy vehicle manufacturer based in China. It was founded in January 2003, following the company's acquisition of Tsinchuan Automobile Company in 2002. BYD produces automobiles, buses, electric bicycles, forklifts, rechargeable batteries, and trucks. The company expands its business rapidly in recent years. BYD increased its revenues during the third quarter of 2020 by 41% year-over-year to 44.5 billion Chinese yuan (equivalent to $6.65 billion US dollars). Not only that, its net income more than doubled compared to the previous year to 1.75 billion Chinese yuan (equivalent to $262 million US dollars). Its board of directors are thinking about global expansion of its business. They set up relevant business plans in this year targeting both the U.S. and Australian markets. To support its international business growth next year in Australia, BYD plans to buy Holden Australia's car factory located in Adelaide. The company is considering issuing a 5-year corporate bond to raise the A$200 million needed to purchase the factory. Its CEO Mr. Jason Wang stated that the company should "go wherever is cheap to borrow." As a recent Finance graduate from University of Sydney, your task is to recommend the best financing strategy for the company according to the following information: BYD currently has a credit rating of BB from the credit rating agency S&P. The current borrowing cost for the company is 4.5% per annum in the USD market, and 5.85% in the AUD market. The current spot exchange rate of USD/AUD is 0.6510. You approached a swap bank ANZ, and they have quoted a 5-year currency swap (with annual interest payments) at: USD 4.5% - 4.65% against 1-year USD LIBOR AUD 5.0% - 5.75% against 1-year USD LIBOR After carefully considering all market information, you think BYD should take advantage of currency swap contracts to lower the cost of borrowing. You are advised by your supervisor to BYD currently has a credit rating of BB from the credit rating agency S&P. The current borrowing cost for the company is 4.5% per annum in the USD market, and 5.85% in the AUD market. The current spot exchange rate of USD/AUD is 0.6510. You approached a swap bank ANZ, and they have quoted a 5-year currency swap (with annual interest payments) at: USD 4.5% - 4.65% against 1-year USD LIBOR AUD 5.0% - 5.75% against 1-year USD LIBOR After carefully considering all market information, you think BYD should take advantage of currency swap contracts to lower the cost of borrowing. You are advised by your supervisor to prepare a report for the company. Before preparing the report, you need to figure out the following problems: 1. Is Mr. Jason Wang's statement on financing policy correct? Why? (3 Marks) 2. Illustrate how BYD could use a currency swap contract to lower its cost of borrowing. Provide the estimated cost savings in percentage on annual basis. (3 Marks) 3. Compute BYD's annual cash flows on interest to pay and interest to receive separately from this currency swap position. After entering into the currency swap contract, how would future changes in the USD/AUD exchange rate impact BYD's net present value from the currency swap contract? (4 Marks) Question 14 10 pts BYD Auto is a leading new energy vehicle manufacturer based in China. It was founded in January 2003, following the company's acquisition of Tsinchuan Automobile Company in 2002. BYD produces automobiles, buses, electric bicycles, forklifts, rechargeable batteries, and trucks. The company expands its business rapidly in recent years. BYD increased its revenues during the third quarter of 2020 by 41% year-over-year to 44.5 billion Chinese yuan (equivalent to $6.65 billion US dollars). Not only that, its net income more than doubled compared to the previous year to 1.75 billion Chinese yuan (equivalent to $262 million US dollars). Its board of directors are thinking about global expansion of its business. They set up relevant business plans in this year targeting both the U.S. and Australian markets. To support its international business growth next year in Australia, BYD plans to buy Holden Australia's car factory located in Adelaide. The company is considering issuing a 5-year corporate bond to raise the A$200 million needed to purchase the factory. Its CEO Mr. Jason Wang stated that the company should "go wherever is cheap to borrow." As a recent Finance graduate from University of Sydney, your task is to recommend the best financing strategy for the company according to the following information: BYD currently has a credit rating of BB from the credit rating agency S&P. The current borrowing cost for the company is 4.5% per annum in the USD market, and 5.85% in the AUD market. The current spot exchange rate of USD/AUD is 0.6510. You approached a swap bank ANZ, and they have quoted a 5-year currency swap (with annual interest payments) at: USD 4.5% - 4.65% against 1-year USD LIBOR AUD 5.0% - 5.75% against 1-year USD LIBOR After carefully considering all market information, you think BYD should take advantage of currency swap contracts to lower the cost of borrowing. You are advised by your supervisor to BYD currently has a credit rating of BB from the credit rating agency S&P. The current borrowing cost for the company is 4.5% per annum in the USD market, and 5.85% in the AUD market. The current spot exchange rate of USD/AUD is 0.6510. You approached a swap bank ANZ, and they have quoted a 5-year currency swap (with annual interest payments) at: USD 4.5% - 4.65% against 1-year USD LIBOR AUD 5.0% - 5.75% against 1-year USD LIBOR After carefully considering all market information, you think BYD should take advantage of currency swap contracts to lower the cost of borrowing. You are advised by your supervisor to prepare a report for the company. Before preparing the report, you need to figure out the following problems: 1. Is Mr. Jason Wang's statement on financing policy correct? Why? (3 Marks) 2. Illustrate how BYD could use a currency swap contract to lower its cost of borrowing. Provide the estimated cost savings in percentage on annual basis. (3 Marks) 3. Compute BYD's annual cash flows on interest to pay and interest to receive separately from this currency swap position. After entering into the currency swap contract, how would future changes in the USD/AUD exchange rate impact BYD's net present value from the currency swap contract? (4 Marks)
