- Kristian Harianja - Rizky Yulianto P.- Oktawidya Intan - Ratna Nawang S.- Putri Rizky D. - Vivi Agustin

OPERATING EXPOSURE

To what extent a company's future cash flow will be altered by exposure to changes in the exchange rates combined with price changes

Consolidated Financial Statement

Problem Analysis

– Toyota a leading global automobile manufacturer whose stock is widely held in MFS portfolios

– Domiciled in Japan, but generates the largest amount of sales in North America (making up 35% of group unit sales in the fiscal year compared to 27% in Japan) followed by Europe

– Euro weaken versus the Japanese yen, would be mismatch between its cost base (largely in Japan) and its export sales to the Euro

Problem Analysis

Toyota profits is negatively affected in two ways :• when they attempted to align the prices of their

vehicles sold in the Europe with those prices being charged by the Detroit ‘big three’ manufacturers (despite higher costs due to the strong yen);

• When they translates Euro profits back into yen at disadvantageous exchange rate

CASE QUESTIO

N

1. Why do you think Toyota had waited so long to move much as its manufacturing for European sales to EuropeAnswer :Automobile are complex and capital intensive industry. Making new manufacturing facilities are costly. Therefore, Toyota took time to analyze :-Country risk in targeted country-Survey in market share and location in order to achieve targeted profit and its sustainable growth -Investment financial analysis including required payback period, ROI, NPV, IRR

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Japan\ 2163 1913 1872

Norh America 3098 2031 798

Europe                 858 796 1327  

Asia 979 1255 1284

Ohers 1139 1313 5281

2. If the British pound where join the European Monetary Union would the problem be resolved? How likely do you think this is?Answer :

If British currency is converted to Euro, it will only eliminate the currency risk between UK and Europe but not eliminate currency risk between Europe and Japan.

Recommendation• Enters into short-term (three to six months) currency hedges in

order to make internal planning easier• Adopting operating and financing policies that offset anticipate

foreign exchange exposures :– Matching currency cash flows– Risk – sharing agreements– Back-to-back loans– Currency swap• Contract/hedging to local (Euro currency) vendor• Recruit analyst finance• SPOT option