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Evaluate between Japanese term loan and Goldman’s proposal There are many alternatives which can hedge this exposure; however, Mr. Anderson decided to rule out some of them for the reasons as follows: * FX option

* Ruling out due to non-exist of long-term maturities
* Long-dated FX forward
* Disney consider it as a part of total exposure
* Currency swap
* Existing Disney’s Eurodollar is short-term; attractive rates for short-term is rare in Mr. Anderson’s perspective * Issuing more long-term Eurodollar debt which then swap in to yen liabilities * This alternative will make Disney facing even higher debt ratio. * Issuing Euro-yen bonds

* Disney was ineligible to issue this instrument according to Japanese regulations.

Among those alternatives mentioned above, there are only two alternatives left which are considered to be the most attractive ways and; thus, they be evaluated as follows: 1. Create YEN liability directly in Japan

2. Issue ECU bond and then swap with a French utility
In the followings, we will calculate the all-in cost and compare these alternatives.

Choice 1 - Create JPY liability
Due to the company’s constraints which are an incapable of issuing Euroyen bond, long-term Eurodollar and others as mentioned above, an available choice is that the company should directly create yen liability with Japanese bank at its prime rate. This will result in long-term natural hedge of Japanese yen as the company also receives Japanese royalties. The loan terms are as follows:

Loan| 15 billion| |
Fees| 0.75%| |
Time| 10 years| |
Rate| 7.50% semi-annual| |
Bullet loan| Principle repaid at maturity|

Repayment schedule:
Year| 15 billion x (1-0.75%)
15 billion x (1-0.75%)
|
0| 14.8875|
1| -0.5625|
2| -0.5625|
3| -0.5625|
4| -0.5625|
5| -0.5625|
6| -0.5625|
7| -0.5625|
8| -0.5625|
9| -0.5625|
10| -0.5625|
11| -0.5625|
12| -0.5625|
13| -0.5625|
14| -0.5625|
15| -0.5625|
16| -0.5625|
17| -0.5625|
18| -0.5625|
19| -0.5625|
20| -15.5625|
| |
IRR| 3.804%|
Effective IRR* | 7.75%|
* All-in cost is a discount rate which makes present discounted value of future debt service equal to net initial principle obtained from issuing debt. It can also be referred as IRR.

Thus, all-in cost of the Japanese term loan is equal to 7.75%

Choice 2 - Issue ECU bond and then swap with a French utility
There are two steps to hedge this exposure
1. Issue 10-year ECU Eurobond
2. Swap into a yen liability with French utility
Let’s consider step by step

Step1: Issue 10-year ECU Eurobond
According to Goldman’s proposal the terms of issue are as follows: Par:| ECU 80 million|
Price:| 100.250%|
Coupon:| 9.125%|
Fees:| $75,000/0.7420 = ECU 101,078
$75,000/0.7420 = ECU 101,078
2.000%|
Expenses:| $75,000 |
Dollar/ECU:| ECU 101,07880 million=0.126%
ECU 101,07880 million=0.126%
0.7420|
*ECU 16 million/year sinking fund from year 6 to year 10|

According to Exhibit 6, we can calculate all-in cost as follows: Year| Net ECU Proceed=100.25%-2.0%-0.126% = 98.124%

Net ECU Proceed=100.25%-2.0%-0.126% = 98.124%

Cash Flows
(million ECU)|
| |
0| ECU 80 million x 98.124% 101,078
ECU 80 million x 98.124% 101,078
78.499|
1| (7.300)|
2| (7.300)|
3| (7.300)|
4| (7.300)|
5| (7.300)|
6| (23.300)|
7| (21.840)|
8| (20.380)|
9| (18.920)|
10| (17.460)|
IRR| 9.47%|
Thus, all-in cost of the ECU Eurobond is equal to 9.47%

Step2: Swap ECU into Japanese Yen liabilities
Swaps are exist due to the fact that this transaction will make two parties better off and enjoy lower all-in cost rate due to their comparative advantage on interest from each party. According to Disney’s all-in cost of the Japanese Yen term and ECU Eurobond calculated previously and information from Exhibit...
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