Dozier case;

Instructions for Dozier case; The case should be done by a study group consisting of three to four students. We will form groups in class, initially allowing for students’ preferences regarding co-workers. Each member of the group will be fully responsible for understanding and analyzing the case (e.g., for the final exam), but the group should submit only one (typed) report. The report should consist of a l- to 11/2-page memo, plus backup documents with the specific calculations used in drawing your conclusions. You should think of yourself as an assistant to Richard Rothschild (chief financial officer of Dozier Industries), advising your boss on how to handle this particular cash flow. Cases are graded for both analytical and presentational skills. You should therefore make an effort to write a good memo that summarizes the situation, briefly outlines the alternatives, and makes a recommendation - all in less than 1% pages. Numerical computations should be in a technical appendix; not in the memo. “Bottom-line” results from those calculations should, of course, be included within the memo. Expositional clarity is valued. The memo should address the following questions: 1. What is the profit in dollars, before taxes, if Dozier uses a forward market hedge? Measure this profit at the end of the period (i.e., in future value terms). 2. What is the net profit, before taxes, if Dozier uses a money market (or spot market) hedge? 3. What is the “break-even” exchange rate, defined as the spot rate at the end of the period that will yield zero profit to the firm from this particular transaction if it does not hedge? Remember, however, that this is a memo - not a problem set. This information should be used to clarify alternatives. Clarifications The costs of this project (materials, etc.) are incurred at the end of the project, and amount to $812,111. The spot rate at the beginning of the period is 2.029 $/pound; not 2.032 $/pound. If Dozier borrows in pounds, it does so at 1‘/2% above the prime rate in Britain. If Dozier directly invests in dollars, it does so at the Eurodollar interest rate of 5.375% per annum. Dozier converts any pounds (the down payment) to dollars at the spot rate of $2.029 $/pound. You should also assume that Dozier’s rate of interest for its short term credit line from the bank (the Notes Payable - Bank subcomponent of Current Liabilities in the balance sheet) is 8% per annum. Payiing off these liabilities early saves Dozier roughly 2%/quarter in future interest expenses. You should also compute the probability of Dozier losing money on the project if it does not hedge; i.e., the probability of the $/pound exchange rate falling below the break-even rate. This computation can usefully illustrate the risk associated with not hedging. When computing probabilities, you can assume the expected future spot rate equals the forward rate, and the volatility (standard deviation) of percentage changes in the $/pound exchange rate is 10% per annum. Any such computations would of course go in the technical appendix, with only the resulting probability going in the memo.