DOZIER industri Essay

Richard Rothschild, the chief financial officeholder of Dozier Industries, returned to his office after run across with cardinal officers of Southeastern National Bank. He had bespeak the meeting to discuss financial issues associate to Doziers first major distant gross sales engage, which had been con unwaveringlyed the previous mean solar day, January 13, 1986. Initi eachy, Rothschild had contacted Robert Leigh, a vice president of the bank, who had primary responsibilities for Doziers business with Southeastern National. Leigh, feeling that he lacked the international expertise to answer all the questions Rothschild might raise, had suggested that John Gunn of the banks International Division be included.The meeting had focused on the de amazeize take a chance related to the new sales contract. Doziers bid of (British castigates) GBP1.175 million to install an privileged certification system for a king-sized manu particularuring squiffy in the United soil had bee n accepted. In accordance with the contract, the British firm had transferred a 10% deposit (GBP117,500), the repose due when the system was completed. Doziers take vice president, Mike Miles, had cognizant Rothschild that there would be no difficulty in completing the project within the 90-day point in time stipulated in the bid. As a result, Rothschild was supply on receiving GBP1.0575 million on April 14, 1986. community HistoryDozier Industries, a relatively one-year-old firm specializing in electronic security systems, was established in 1973 by Charles L. Dozier, who was lock away president and the induceer of 78% of the stock. The remain 22% was held by some other members of anxiety. Dozier had at one time been a bearing engineer for a bigger electronics firm. In 1973 he began his own company to market security systems and began by concentrating on military sales. The company go through rapid growth for almost a decade. only in 1982, as Dozier set about incr eased competition in this market, circumspection attempted to branch out to design systems for small private firms and households. Doziers  inexperience in this market, combined with poor cookery endeavours, slowed sales growth and led to a severe reduction in lucre (see evince 1). The company shifted its focus to bigger corporations and met with better success. In 1985, the company showed a meshing for the first time in three years, and management wasThis case was nimble by Professor Mark R. Eaker. It was compose as a basis for partition discussion rather than to illust regulate impelling or ineffective handling of an administrative situation. Copyright 1986 by the University of Virginia Darden work Foundation, Charlottesville, VA. all(a) rights reserved. To align copies, send an e-mail to salesdardenbusinesspublishing.com No part of this publication whitethorn be reproduced, stored in a convalescence system, used in a spreadsheet, or transmitted in any blueprint or by any directionelectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation.  confident that the company had turned the corner. give 2 contains the balance sheet at the end of 1985.The companys management believed that sales to foreign corporations represented inviol suitable prospects for future growth. Consequently, in the spring of 1985, Dozier had launched a marketing effort overseas. The marketing effort had not met with much success until the hitch of the contract discussed previously. The new sales contract, although large in itself, had the potential of being expand in the future because the company tough was a large multinational firm with manufacturing facilities in many countries.Foreign diversify Risk and HedgingOn January 13, the day the bid was accepted, the note abide by of the belabor was (U.S. dollars) USD1.4480. But the thump had weakened over the previous six weeks (see show up 5). Roth schild was concerned that the value of the pound might depreciate counterbalance further during the next 90 days, and it was this have-to doe with that prompted his discussion at the bank. He cute to find out what techniques were available to Dozier to sign up the give-and-take risk created by the salient(ip) pound receivable.Gunn, the international specialist, had explained that Rothschild had several alternatives. First, of course, he could do nothing. This would leave Dozier vulnerable to pound fluctuations, which would entail losses if the pound depreciated, or gains if it appreciated versus the dollar. On the other hand, Rothschild could opt to defer his ex promote over risk. Gunn explained that a hedge involved taking a locating opposite to the one that was creating the foreign exchange exposure. This could be accomplished either by engaging in a send on contract or via a billet trans litigate. Since Dozier had an outstanding pound receivable, the appropriate hedg ing transactions would be to sell pounds front 90 days or to plug a 90-day pound loan. By selling pounds earlier, Dozier would incur an promise to deliver pounds 90 days from now at the rate established today. This would ensure that Dozier would receive a set dollar value for its pound receivable, regardless of the spot rate that existed in the future. The spot hedge worked similarly in that it also created a pound obligation 90 days hence.Dozier would borrow pounds and exchange the proceeds into dollars at the spot rate. On April 13, Dozier would use its pound receipts to remunerate the loan. Any gains or losses on the receivable due to a change in the value of the pound would be offset by equivalent losses or gains on the loan payment. Leigh assured Rothschild that Southeastern National would be able to assist Dozier in implementing whatever close Rothschild made. Dozier had a USD3 million line of recognise with Southeastern National. John Gunn indicated that there would b e no difficulty for Southeastern to regulate the pound loan for Dozier through its similar bank in London. He believed that such a loan would be at 1.5% above the U.K. prime rate. In order to assist Rothschild in making his  close, Gunn provided him with culture on interest rates, spot and forward exchange rates, as well as historical and forecasted information on the pound (see Exhibits 4, 5, and 6). Rothschild was aware that in preparing the bid, Dozier had allowed for a profit margin of only 6% in order to increase the likelihood of lovable the bid and, hence, developing an important foreign contact. The bid was submitted on December 3, 1985. In arriving at the bid, the company had estimated the cost of the project, added an measurement as profit, but kept in mind the highest bid that could conceivably win the contract. The calculations were made in dollars and then born-again to pounds at the spot rate alive on December 3 (see Exhibit 3), since the U.K. company had s tipulated payment in pounds.Rothschild agnise that the amount involved in the contract was such that an adverse move in the pound exchange rate could put Dozier in a loss pose for 1986 if the transactions were left unhedged. On the other hand, he also became aware of the fact that hedging had its own costs. Still, a decision had to be made. He knew that no action implied that an unhedged position was the best alternative for the company.Exhibit 1DOZIER INDUSTRIES (A) gross sales and Income Summary form Ended December 311973197419751976197719781979198019811982198319841985Sales (in thousands)4566318901,6103,8607,24211,33815,13820,37121,45522,50123,98625,462Net Income (in thousands)4154731513247601,1621,4881,925712(242)(36)309Exhibit 2DOZIER INDUSTRIES (A)Balance cruise as of December 31, 1985AssetsCurrent assets immediate payment and securitiesAccounts receivableInventories radical current assetsProperties, plants, and equipmentAt costLess Accumulated disparagementNet plantOther as setsInvestments and loansTotal assetsLiabilities and EquityCurrent liabilitiesAccounts collectibleNotes payable bankTotal current liabilitiessemipermanent liabilitiesNotes payable greens candourCommon stockReservesRetained requitalTotal equityTotal liabilities and equityUSD294,5721,719,4942,227,0664,241,1328,429,8122,633,4045,796,408450,000USD10,487,540934,582652,8001,587,382550,0002,253,410627,2445,469,5048,350,158USD10,487,540Exhibit 3DOZIER INDUSTRIES (A)Bid facilityMaterials result laborShippingUSD847,061416,82070,000Direct operating expense*208,410Allocation of indirect overhead100,492Total costProfit calculate1,642,783USD98,567Spot pound rate on December 3 USD1.4820 throb value of the bid GBP1,175,000*Based on 50% of direct labor.Exhibit 4DOZIER INDUSTRIES (A) involvement and Exchange Rate ComparisonsJanuary 14, 1986Three-month money* gear up lending rateThree-month deposits (large amounts)EUR/USD 3-month (LIBOR)EUR/USD 3-month (Paris)3-month treasury bills in LondonUni ted States United ground7.6513.419.5013.508.0012.908.313.212.2The spot rate for the pound USD1.4370Three-month forward pound USD1.4198*Prime commercial written report in the United States Interbank rates in the United Kingdom.Source The Economist.Exhibit 5DOZIER INDUSTRIES (A)Historical Spot and forrader Pound Rates in U.S. Dollars7/9/857/167/237/308/68/138/208/279/49/109/179/2410/110/810/1510/2210/2911/511/1211/1911/2612/312/1012/1712/2312/301/7/861/14/86Spot1.36401.38801.40901.41701.34051.39401.39001.39401.36651.30651.33301.42001.41201.41551.41201.42901.43901.43151.41581.43201.47501.48201.43381.43801.42451.43901.44201.4370Source clams Mercantile Exchange Statistical Yearbook.3-Month Forward Rate1.34901.37441.39631.40671.32961.38281.37841.38171.35531.29601.32261.40891.40051.40391.40071.41711.42701.41941.40371.42001.46281.47041.42141.42491.41141.42601.42841.4198