Essay about Rjr Finance - 1864 Words

Global Energy Management Institute International Financial Risk Management R.J. Reynolds International Financing HBS Case 9-287-057 The case is set in the context of RJR’s 1985 financing of its $4.9 billion acquisition of Nabisco Brands Inc. To finance the acquisition, RJR was proposing the issue of $1.2 billion of 12 year notes and the same amount in preferred stock. It had already funded $1.5 billion of the acquisition leaving $1 billion more to finance. Challenges facing RJR: Of the $1.5 billion that had been funded, $500 million came from cash and the remaining was through bank borrowings and commercial paper. These borrowings added to the debt that RJR had issued in 1984 and brought their debt ratings down to A. The†¦show more content†¦MGL does another swap with RJR where they pay $ LIBOR to RJR in return for fixed dollar cash flows at 10.92% from MGL (Floating for fixed dollars). Effectively this implies (using Exhibit 9) that MGL pays fixed 7.1% yen to RJR and receives fixed dollars at 10.92% from RJR. The dollar cash flows in this case from RJR to MGL would be estimated as follows: RJR needs yen cash flows in years 1-5 given above. To convert these at a 7.1% swap rate into dollar cash flows at 10.92% : 1. Take the PV of these yen cash flows at 7.1% This equals Yen 24,258,824,814.179 2. At the current spot rate (ask) of 236.90 this converts to $ $102,401,117.83 This is the present value of the yen cash flows at 7.1%. RJR’s dollar payments are then set at 10.92% of this value. These numbers are shown below: |Euroyen bonds(swapped) | 25,000,000,000.00 |Dollars | |Year |Cash flows | | |0 | 24,593,750,000.00 |$102,401,117.83 | |1 | 1,593,750,000.000 |-Show MoreRelated Efficient Market Theory and Behavioural Finance Essay1787 Words   |  8 Pagesbacked up by sound calculation and theories. 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