R. J. REYNOLDS INTERNATIONAL FINANCING, 9-287-057: CASE ANALYSIS
There are two essential requirements in the analysis of this case. The first requirement is to examine the financing alternatives being presented to the company to assess their appropriateness for the company. The second requirement is to identify other financing alternatives that might also be appropriate for the company.
Assessing the Appropriateness of the Financing alternatives Presented to the Company in 1985
The company has been presented with three financing alternatives. The three financing alternatives are (a) five-year yen/dollar dual currency Eurobond, (b) a five-year Eurodollar bond, and (c) a five-year Euroyen bond. The appropriateness of the alternatives for the company is to be assessed within the contexts of (a) debt/equity issues, (b) maturity concerns, (c) fixed-rate/floating rate concerns, (d) currency matching/mismatching concerns, and (e) financial market of issue (domestic, foreign, or Euro) considerations.
The initial action required in the assessment of the appropriateness of the financing alternatives for the company is to calculate and compare the all-in costs of the three financing alternatives. All-in cost calculations involve the determination of the internal rates of return (IRR) for each of the three financing alternatives proposed for the company. A comparison of the summary data of the all-in costs for the three financing alternatives is presented in Table 1 (below on this page).
Table 1 ù Summary Comparison of All-In Costs for Three Financing Alternatives
All-in Cost of Alternative (Cash Flows Converted to US$) Stated as IRR
5-year Ñ/US$ Dual-Currency Eurobond (Hedged into US$ with Forward Contract)
5-year Euroyen Bond (Hedged into US$ with Currency Swap)
As the data presented in Table 1 indicate, the
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