Wilkinson Solution
International Financial Management
WILKINSON SWORD TRIALS AND
TRIBULATIONS IN
TURKEY
CASE STUDY NUMBER 2
Performed by:
Problematique
In 2000, Wilkinson Sword-Turkey SA, (hereinafter “WST”) won the approval for a $12 million capital expenditure to finance the launch of a new product line, the Quattro shaving system, from its US-based parent company. Mrs. Ozcan, President and GM of the Turkish subsidiary, had to chose between two financing options: (1) Extension of the USD denominated intercompany receivables, at an annual interest rate of 7.5%, and (2) Local bank debt denominated Turkish Lira
(TRL), at an annual interest rate of 45%.
In order to evaluate the financing decision, several issues must be taken into account:
Country Risk: The political situation in Turkey has been characteristically unstable. WST management would have witnessed changing regulatory conditions in foreign exchange controls and the prohibition of repatriation. These restrictions were lifted in 1980, but certain limitations remain to the present day. First, the payment of royalties, fees, dividends and profits are subject to government approval. Second, a progressive tax was levied on all remittances in excess of 12% of registered capital, and a fixed 25% tax for remittances greater than 20% of registered capital.
Currency Risk: WST’s presence in the Turkish market exposes it to currency risk. Since
January 1995, the TRL had depreciated against the USD by an average of 14% every 3 months (see
Exhibit 1), and by nearly 50% between 1999-2000;
Translation Exposure: WST reports to its US parent company in USD, and is therefore exposed to currency fluctuations in the periodical consolidation of the subsidiary’s financial statements from TRL into USD.
Hyperinflation: Turkey is historically characterized by hyperinflation (100% in 1994), which shows higher rates for consumer products than for wholesale products (see Exhibit 2).
Launched in 2000, the government’s ambitious stabilization program
WILKINSON SWORD TRIALS AND
TRIBULATIONS IN
TURKEY
CASE STUDY NUMBER 2
Performed by:
Problematique
In 2000, Wilkinson Sword-Turkey SA, (hereinafter “WST”) won the approval for a $12 million capital expenditure to finance the launch of a new product line, the Quattro shaving system, from its US-based parent company. Mrs. Ozcan, President and GM of the Turkish subsidiary, had to chose between two financing options: (1) Extension of the USD denominated intercompany receivables, at an annual interest rate of 7.5%, and (2) Local bank debt denominated Turkish Lira
(TRL), at an annual interest rate of 45%.
In order to evaluate the financing decision, several issues must be taken into account:
Country Risk: The political situation in Turkey has been characteristically unstable. WST management would have witnessed changing regulatory conditions in foreign exchange controls and the prohibition of repatriation. These restrictions were lifted in 1980, but certain limitations remain to the present day. First, the payment of royalties, fees, dividends and profits are subject to government approval. Second, a progressive tax was levied on all remittances in excess of 12% of registered capital, and a fixed 25% tax for remittances greater than 20% of registered capital.
Currency Risk: WST’s presence in the Turkish market exposes it to currency risk. Since
January 1995, the TRL had depreciated against the USD by an average of 14% every 3 months (see
Exhibit 1), and by nearly 50% between 1999-2000;
Translation Exposure: WST reports to its US parent company in USD, and is therefore exposed to currency fluctuations in the periodical consolidation of the subsidiary’s financial statements from TRL into USD.
Hyperinflation: Turkey is historically characterized by hyperinflation (100% in 1994), which shows higher rates for consumer products than for wholesale products (see Exhibit 2).
Launched in 2000, the government’s ambitious stabilization program