Case Solution (Wright-Anderson)

Class:
MBA10
Submitted To:
Sir Zaheer Abbas

Group Members
AAMIR ZULFIQAR
ARJUMAND HUSNAIN
SOHAIB HASSAN
Wright Anderson case study

INTRODUCTION TO THE CASE:

Paul Fitzpatrick is the vice president of finance at Wright-Anderson Machines.

He is a manufacturer of heavy industrial equipment in Canada. In 1981 he
took a loan of 60 million at six percent interest rate from Switzerland. At that
time the Canadian dollar equivalent of the loan was about CDN$ 37 million.
Now the loan was approaching maturity and he had no resources available to
retire but to refinance the loan. For the purpose of retiring the loan he wants
to roll over it. Now he has four options from which he can borrow money; they
are Switzerland, Germany, U.S.A, and Canada.

ISSUES IN THE CASE:

As the case describes a complex situation of international borrowing from

different countries. Wright Anderson wants to refinance their loan with the
option they can pay the lowest rates. so all calculations in the case are on
exchange rates. and issue is international borrowing.

RISKS INVOLVED IN INTERNATIONAL BORROWING:

3 major risks are normally associated with international borrowing. and they
are

A.POLITICAL RISK:

Analysis of the case and general information says there is no political

risks involved as they have to borrow from politically stable countries.

B.EXCHANGE RATE RISK:

In this case of Wright Anderson they have to borrow in Swiss frank, German
dollars and us dollars so there are chances in deprecation of these currrcines.

C.INTERSET RATE RISK:

Interest rate will play an important role because Wright Anderson will have
to buy from options which have lower interest rates.
Calculation of the Expected Rates on Different Currencies

Switzerland (SF)

Total Amount = 60,000,000 SF

Total in CDN = 60,000,000*0.8666

= 51,960,000 CDN

= (60,000,000*1.0525)

= 63,150,000 SF

In terms of CDN = 63,150,000 SF*CDN/SF

CDN/SF = (US/SF)/ (US/CDN)

= 0.6855/0.7624

= 0.899134313

= 63,150,000*0.899134313

= 56780331.85

= {(56780331.82-
51960000)/51960000}*100

= 9.20%

Germany (DM)

Total Amount = 60,000,000 SF

Total in DM = 60,000,000 SF * DM/SF

= 72335329.34

=72,335,329.34*1.060

= 76,675,449.10 DM

In terms of CDN = 76675449.10 DM*CDN/DM

CDN/DM = (US/DM) / (US/CDN)

= 0.5650/ 0.762486
 = 0.7409975

= 76675449.10*0.7409975

= 56,816,316.09

= {(56816316.09-
51960000)/51960000}*100

= 9.27%

United States (USD$)

Total Amount = 60,000,000 SF

Total in USD = 60,000,000 SF *USD/SF

= 39,864,000 $

=39864000*1.0866

= 43,316,222.40 USD

In terms of CDN = 43,316,222.40 USD *CDN/USD

CDN/USD = 1.3115

= 43,316,222.40*1.3115

= 56,809,225.68

Cost = {(56,809,225.68 -
51960000)/51960000}*100

= 9.26%

Canada (CDN$)

= 9.37%
ANNUAL COST IN CDN $

YEAR SF ER CDN

0.619
1981 0.6 8 37.188

0.636 2.2899
1982 3.6 1 6

0.598 2.1553
1983 3.6 7 2

0.592 2.1340
1984 3.6 8 8

0.522 1.8802
1985 3.6 3 8

0.720 2.5934
1986 3.6 4 4

0.866 55.115
1987 63.6 6 76

AVERAGE ANNUAL COST

INFLOW = OUTFLOW

37.188 =(2.29/1+R)+(2.133/(1+R)^2)+(2.134/(1+R)^3)+………
(55.115/(1+R)^6)

To calculate average annual cost we have to find R.

For calculation we need the value of R, for this we will use the method of
interpolation.

if

R=10%

X=2.881+1.762+1.603+1.284+1.610+31.110

X=39.450

If

R=12%

Y=2.044+1.700+1.519+1.195+1.971+27.922

Y=35.85

(10% - R)/(10% - 12%) =(39.450 – 37.188)/(39.450 – 35.85)

(10% - R)/(10% - 12%) = 2.262/3.6

R = 11.256%

The average annual cost of loan in CDN $ is 11.256%.

Conclusion

The loan options from USA, Canada and Germany are expensive as compared
to the loan from Switzerland. SO after all the calculations, it is clearly stated
that the loan from Switzerland is the cheapest among all others i.e. 9.20%. So
he should borrow from Switzerland.