DOZIER industri Essay

Richard Rothschild, the knob financial officer of Dozier Industries, returned to his office later meeting with two officers of s verbotenheastern discipline Bank. He had requested the meeting to talk over financial issues related to Doziers stolon major outside(a) sales contract, which had been substantiate the previous day, January 13, 1986. Initially, Rothschild had contacted Robert Leigh, a vice chairperson 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 exp unrivalednt raise, had suggested that stern Gunn of the banks International lineament be included.The meeting had focused on the change gamble related to the impudent sales contract. Doziers play of (British switchs) GBP1.175 one one thousand thousand meg to install an internal security establishment for a queen-size manufacturing firm in the get together Kingdo m had been accepted. In conformance with the contract, the British firm had transferred a 10% deposit (GBP117,500), the oddment callable when the system was completed. Doziers production vice president, microphone Miles, had assured Rothschild that there would be no worry in completing the sick within the 90-day period stipulated in the bid. As a result, Rothschild was planning on receiving GBP1.0575 million on April 14, 1986.Company HistoryDozier Industries, a relatively young firm specializing in electronic security systems, was established in 1973 by Charles L. Dozier, who was still president and the sustainer of 78% of the stock. The remaining 22% was held by other members of centering. Dozier had formerly been a number engineer for a large electronics firm. In 1973 he began his own attach to to commercialise security systems and began by concentrating on military sales. The attach to experienced rapid harvest-festival for almost a decade. But in 1982, as Dozier fa ced sum upd challenger in this market, management attempted to pitchfork out to design systems for small snobbish firms and households. Doziersinexperience in this market, have with poor planning causal agencys, slowed sales offshoot and led to a severe reduction in profits (see give 1). The f stridernity shifted its focus to larger corporations and met with better success. In 1985, the corporation showed a profit for the origin time in three years, and management wasThis case was prepared by professor Mark R. Eaker. It was written as a basis for class discussion quite than to illust post effective or inefficacious handling of an administrative situation. Copyright 1986 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, come out an e-mail to salesdardenbusinesspublishing.com No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. confident that the company had turned the corner. evince 2 contains the balance sheet at the end of 1985.The companys management believed that sales to hostile corporations represented good prospects for upcoming growth. Consequently, in the spring of 1985, Dozier had launched a marketing effort overseas. The selling effort had not met with a great deal success until the confirmation of the contract discussed previously. The refreshful sales contract, although large in itself, had the electric potential of being expanded in the future because the company conglomerate was a large multinational firm with manufacturing facilities in umteen countries.Foreign supersede Risk and hedgerowOn January 13, the day the bid was accepted, the cheer of the outfox was (U.S. bucks) USD1.4480. But the mystify had washed-out over the previous six weeks(see E xhibit 5). Rothschild was concerned that the prize of the quid pro quo might depreciate even further during the next 90 age, and it was this worry that prompted his discussion at the bank. He wanted to find out what techniques were available to Dozier to reduce the throw risk created by the outstanding pound receivable.Gunn, the international specialist, had explained that Rothschild had several alternatives. First, of course, he could do nothing. This would will Dozier vulnerable to pound fluctuations, which would entail losings if the pound depreciated, or gains if it appreciated versus the dollar. On the other hand, Rothschild could choose to hedge his exchange risk. Gunn explained that a hedge involved fetching a position opposite to the one that was creating the foreign exchange exposure. This could be completed either by engaging in a forward contract or via a while transaction. Since Dozier had an outstanding pound receivable, the appropriate hedging transactions wou ld be to sell pounds forward 90 years or to secure a 90-day pound contri just noweword. By selling pounds forward, Dozier would incur an obligation to deliver pounds 90 days from outright at the rate established today. This would chink that Dozier would receive a set dollar value for its pound receivable, regardless of the speckle rate that existed in the future. The spot hedge worked similarly in that it overly 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 repay 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 pay. Leigh assured Rothschild that Southeastern National would be able to assist Dozier in implementing whatever decision Rothschild made. Dozier had a USD3 million line of credit with Southeastern National. washbowl Gunn indicated that ther e would be no difficulty for Southeastern to arrange the pound loan for Dozier through its correspondent bank in London. He believed that such a loan would be at 1.5% above the U.K. prime of life rate. In order to assist Rothschild in making hisdecision, Gunn provided him with tuition on engross 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 altogether 6% in order to increase the likelihood of winning the bid and, hence, evolution an important foreign contact. The bid was submitted on declination 3, 1985. In arriving at the bid, the company had estimated the make up of the project, added an amount as profit, but kept in mind the highest bid that could conceivably win the contract. The calculations were made in dollars and then converted to pounds at the spot rate existing on declination 3 (see Exhibit 3), since the U.K. company had stipulated payment in pounds.Rothschild realized that the amount involved in the contract was such that an indecent move in the pound exchange rate could put Dozier in a loss position for 1986 if the transactions were odd 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 better alternative for the company.Exhibit 1DOZIER INDUSTRIES (A) gross sales and Income SummaryYear Ended celestial latitude 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 Sheet as of December 31, 1985Assets accepted assetsCash and securitiesAccounts receivableInventories radical current assetsProperties, dresss, and equipmentAt cost slight Accum ulated depreciationNet plantOther assetsInvestments and loans tote up assetsLiabilities and EquityCurrent liabilitiesAccounts payableNotes payable bankTotal current liabilitiesLong-term liabilitiesNotes payable uncouth honorCommon stockreservesRetained earningsTotal 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 PreparationMaterialsDirect repulseShippingUSD847,061416,82070,000Direct overhead*208,410 parceling of indirect overhead100,492Total costProfit factor1,642,783USD98,567 moorage pound rate on December 3 USD1.4820Pound value of the bid GBP1,175,000* found on 50% of direct labor.Exhibit 4DOZIER INDUSTRIES (A)Interest and Exchange station ComparisonsJanuary 14, 1986Three-month money* prime quantity lending rateThree-month deposits (large amounts)EUR/USD 3-month (LIBOR)EUR/USD 3-month (Paris)3-mont h treasury bills in London join States United Kingdom7.6513.419.5013.508.0012.908.313.212.2The spot rate for the pound USD1.4370Three-month forward pound USD1.4198*Prime commercial paper in the United States Interbank rates in the United Kingdom. opening The Economist.Exhibit 5DOZIER INDUSTRIES (A)Historical ghost and Forward 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 Chicago 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