Question

Gentry Inc. is a mid-sized tech firm (200 employees and $300 million in revenue) and has been privately held since the firm’s inception ten years ago. The organization’s board of directors is keen on expanding the operations globally to take advantage of a growing market. Based on reports from the research and development team, the organization can increase its profitability metrics by 15 to 25% if it expands the operations to China, Japan, and Germany. Becoming a multinational organization will not be easy. To finance this expansion, the board of directors has decided to take the organization public and issue some bonds to raise an additional $50 million. The research team has already determined that the organization meets the financial requirements outlined by the Securities Exchange Commission. The goal is to maximize the Initial Public Offering (IPO), and the leadership must efficiently manage the capital, measure the risk of the investments, and ensure the financial metrics are robust relative to similarly sized organizations.

Based on the information that you learned about the different types of risk, scenario, and sensitivity analysis, you will be identifying the risks that will be associated with the IPO and global expansion. Using your readings from this module:

Provide your recommendation in an 800-word paper with APA formatting.

Determine how each of the following risk exposures affects the international expansion of Gentry.

1. transaction risk
2. translation risk
3. economic risk

Include how you would use sensitivity and scenario analysis to make your recommendation. Spell out the advantages and disadvantages of each method.

Answer 1

1. Transaction risk : Transaction risk refers to adverse affect that foreign exchange rate fluctuations can have on completed transactions prior to settlement. It is the exchange rate risk associated with time delay between entering into contract and settling it. Transaction risk tends to increase when there is a long period of time between entering into contract and settling it. Transaction risk can be reduced by utilizing forwards and options contracts to hedge adverse exchange rate moves.

2. Translation risk : Translation risk is the risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes. This occurs when a firm denominates a portion of its equities, assets, liabilities or incomes in foreign currency. It is also known as Accounting Exposure. Translation risk can lead to what appears to be financial gain or loss that is not a result of change in assets but in the current value of assets based on exchange rate fluctuations.

3. Economic Risk : Economic risk is the chance that macro economic conditions like exchange rates , government regulation, or political stability will affect an investment in foreign country. Economic risk is one reason international investing carries more risky than domestic investing.

By considering transaction, translation and economic risks, Gentry can expand its operations in China, Japan and Germany it expansion increased profitability metrics by 15% to 25%.