Operating Exposure Presentation

OPERATIN
G
EXPOSURE
- “Coyote is always waiting. And Coyote is always hungry”
01
Introduction
1.1. What is Operating Exposure?
Introduction
Referred to as
Competitive Exposure/Strategic Exposure.
Measures changes in PV resulting from changes in future

operating cash flows.
Operating
Exposure Assesses the impact of changing exchange rates on a firm’s
operations over months and years and on its competitive
position vis-à-vis other firms.
Identify strategic moves or operating techniques to enhance

its value
Comparison
Transaction Translation
Bases Economic Exposure
Exposure Exposure
At a point of time
Duration Medium to long-term Short-term
(conversion)
Actual, total value

Actual, total value difficult Paper exercise only easy
Gains or Losses relatively less difficult to
to compute to work out
calculate
Contract General in nature Specific in nature Specific in nature
Value depends on variation Value depends on changes Value depends on

Measurement
on actual spot rate on actual spot rate accounting guidelines
Difficult because difficult

Hedging Relatively easy Easy
to predict
01
Introduction
1.2. A Multinational’s
Operating Exposure
Determinants
The structure and operations determine the nature of its operating
exposure
Functional currencies of
All financial metrics the individual subsidiaries
Ireland-based and values have to be determine the overall
publicly traded consolidated and operating exposure of the
company expressed in euros. firm in total
Determinants
Determinants
Operating exposure Cash flows
● net of cash inflows and A/R A/P

Proceeds from sales Ongoing operating costs
outflows by currency
● how that compares to other
 The net result is the lifeblood of any
companies competing in the
business and the source of value created by the
same markets. firm over time
sells locally and it also exports,
Example but all sales are invoiced in Turkish lira
purchases components from Aidan

Malaysia invoiced in Turkish lira
 Aidan Turkey is clearly Turkish lira-functional,

with all cash inflows and outflows in Turkish lira
Example
 Aidan Ireland is, therefore, obviously euro-functional.

Example
 On net, although having some cash inflows in both Turkish lira and euros, the
dominant currency is the ringgit
Static vs. Dynamic Operating Exposure
Forecasting and analyzing all Forecasting and analyzing

future individual transaction future exposures of all the
exposures. firm’s competitors and
potential competitors worldwide.
Exchange rate changes in the Over longer term, the more

short term affect current and fundamental economic and
immediate contracts. competitive drivers may alter
all cash flows of all units.
Aidan Corporation’s 3 operating subsidiaries
o 2012, the euro depreciates in the market against the Turkish lira.
o At the same time, the Malaysian government continues the gradual
revaluation of the ringgit.
o  The operating exposure of each individual business unit then needs to

be examined statically (transaction exposures) and dynamically (future
business transactions not yet contracted for).
Static vs. Dynamic Operating Exposure
Effects Aidan Malaysia Aidan Turkey Aidan Ireland

(all cash flows in RM, Lira, Euro) (all cash flows in Lira) (all cash flows in Lira)
Effects on RM Appreciates Appreciates Appreciates
Effects on Lira May stay the same Appreciates Appreciates
Effects on Euro Converts to fewer RM No immediate impact Depreciates
No immediate impact,
May suffer from rising
Effects on profit Fall in short-run but may change over the
input costs
medium to long term
Operating and Financing Cash Flows
MNE’s Cash Flow
Operating Cash FLow Financing Cash Flow
Intercompany Intracompany Intercompany

Intracompany Loans &
Receivables & Receivables & Loans & Stockholder
Stockholder equity
Payables Payables equity
o rent & lease payments for facilities and o principal and interest
equipment usage o new equity investments and dividends
o royalty & license fees for technology &
intellectual property usage
o assorted management fees for services
provided
Operating and Financing Cash Flows
MNE’s Cash Flow
Operating Cash FLow Financing Cash Flow
Intercompany Intracompany Intercompany

Intracompany Loans &
Receivables & Receivables & Loans & Stockholder
Stockholder equity
Payables Payables equity
Each of these cash flows can occur:

o at different time intervals
o in different amounts
o in different currencies of denomination
o each has a different predictability of occurrence.
Expected vs. Unexpected Changes in Cash Flows
Operating Exposure’s Features
Long - run Inevitably Management

health subjective responsibility
Far more important for the Depends on estimates of Relies upon the
long - run health of a future cash flow changes interaction of strategies in
business than over an arbitrary time finance, marketing,
transaction/translation horizon purchasing and
exposure production
Expected Changes Unexpected Changes
Definition of
Not included Included
exposure
Management Budgeted financial statements

Unpredictable
perspective already reflect information
Amortize debt should

Debt Service Unpredictab
already reflect the
Perspective le
International Fisher Effect
Investor Information is widely known and

Unpredictable
perspective reflected in market value
Sensitivity of
the firm to
other key
macroecono
mic
variables.
Macroecono
mic
uncertainty:
E.g. Changes
Broader Barely sensitivity of the firm’s in:

o Economic

o The
theoretical
equilibriu
m
between
exchange
rates,
interest
rates,
inflation
rates is
often in
disequilib
Parity
rium
Measuring Operating Exposure
Short Run Long Run

● Cash flow within one-year operating budget ● Cash flows beyond five years
● The Gain or Loss depends on the currency of ● Cash flows will be influenced by the
denomination of expected cash flows reactions of existing competitors and
● The currency of denomination cannot be potential competitors
changed ● All firms are exposed to foreign exchange
● Difficult to change sales price or renegotiate operating exposures whenever foreign
factor costs exchange markets are not continuously in
● Realized cash flows will differ from those equilibrium
expected in the budget
Medium Run: Equilibrium
● Cash flow expected in two-to-five years ● If equilibrium exists continuously, and a
budgets firm is free to adjust prices and costs,
operating exposure will be zero.
● The firm should be able to adjust prices
and factor costs over time ● It is possible that the firm is unwilling or
unable to adjust operations
● National monetary, fiscal and balance of
●  Will experience operating exposure
payments policies determine whether
●  Market Value may be altered
equilibrium conditions will exist and
whether firms will be allowed to adjust
prices and costs.
Medium Run: Disequilibrium
● Cash flow expected in two-to-five

years budgets
● The firm may not be able to adjust

prices and factor costs over time
● Primary problem: The reactions of

existing competitors
● Market value may change

Comparison of MNC’s Adjustments and Response to
Different Operating Exposure’s Intervals
02
Measuring Operating
Exposure
(Aidan Turkey’s case)
Operating Cash Flow
Definition:
Operating cash flow (OCF) is a measure of the amount of cash generated

by a company's normal business operations.
=> This is the value of a business.

Measuring Operating
Exposure
The impact of unexpected exchange rate changes the value of the firm.
The operating exposure is in the long - term.
=> Measure the impact on present value of several next years’ OCF.
OCF’s Principal
Drivers
Sale prices
Operating Cash Cost

Flows
Sales volume
Aidan Turkey’s Case
Reminder:
Aidan Turkey is a subsidiary of Aidan Corporation.

It is a manufacturer in Turkey, sells and exports it’s products.
• All sales are in Turkish lira.
• Its cost is mainly in Turkish lira.
• Aidan Corporation’s functional currency is Euro
The Base Case
Key Assumptions
● Sales volume: 1,000,000

● Sales price per unit: 80.50 Lira
● Direct cost per unit: 60.50 Lira Present value @ 15%
● Income tax: 20% 6,625,501 euros
● Exchange rate: 6.21 Lira/Euro
● Days sales outstanding: 45 days
● Days sales in Inventory: 10 days
● Days payable outstanding: 38 days
Currently 2013
2014F 2015F 2016F 2017F 2018F
Income Statement
Sales revenue 80,500,000 80,500,000 80,500,000 80,500,000 80,500,000
Direct COGS (60,500,000) (60,500,000) (60,500,000) (60,500,000) (60,500,000)
Cash operating expenses (5,600,000) (5,600,000) (5,600,000) (5,600,000) (5,600,000)
Depreciation (3,770,000) (3,770,000) (3,770,000) (3,770,000) (3,770,000)
Pretax profit 10,630,000 10,630,000 10,630,000 10,630,000 10,630,000
Income tax (20%) (2,126,000) (2,126,000) (2,126,000) (2,126,000) (2,126,000)
Net income 8,504,000 8,504,000 8,504,000 8,504,000 8,504,000
Cash Flows for Valuation
Net income 8,504,000 8,504,000 8,504,000 8,504,000 8,504,000
Add back depreciation 3,770,000 3,770,000 3,770,000 3,770,000 3,770,000
Changes in NWC 0 0 0 0 0
Operating cash flow, in Lira 12,274,000 12,274,000 12,274,000 12,274,000 12,274,000
Operating cash flow, in Euro 1,976,490 1,976,490 1,976,490 1,976,490 1,976,490
Present value @ 15% 6,625,501
Unexpected drop of Lira
In January 1st, 2014
6.21 6.4
Lira/Euro Lira/Euro
What to do now?
And Why?
Case 1: Depreciation (all variables remain constant)
Base case
● Sales volume: 1,000,000 ● Sales volume: 1,000,000
● Sales price per unit: 80.50 Lira ● Sales price per unit: 80.50 Lira
● Direct cost per unit: 60.50 Lira ● Direct cost per unit: 60.50 Lira
● Income tax: 20% ● Income tax: 20%
● Exchange rate: 6.21 Lira/Euro ● Exchange rate: 6.4 Lira/Euro
● Days sales outstanding: 45 days ● Days sales outstanding: 45 days
● Days sales in Inventory: 10 days ● Days sales in Inventory: 10 days
● Days payable outstanding: 38 days ● Days payable outstanding: 38 days
Present value @ 15% Present value @ 15%
6,625,501 euros 6,428,805 euros
Decrease 196,699 euros

Case 1: Depreciation (all variables remain constant)
2014F 2015F 2016F 2017F 2018F
Income Statement
Sales revenue 80,500,000 80,500,000 80,500,000 80,500,000 80,500,000
Direct COGS (60,500,000) (60,500,000) (60,500,000) (60,500,000) (60,500,000)
Depreciation (3,770,000) (3,770,000) (3,770,000) (3,770,000) (3,770,000)
Pretax profit 10,630,000 10,630,000 10,630,000 10,630,000 10,630,000
Income tax (20%) (2,126,000) (2,126,000) (2,126,000) (2,126,000) (2,126,000)
Net income 8,504,000 8,504,000 8,504,000 8,504,000 8,504,000
Net income 8,504,000 8,504,000 8,504,000 8,504,000 8,504,000
Changes in NWC 0 0 0 0 0
Operating cash flow, in Euro 1,917,812.5 1,917,812.5 1,917,812.5 1,917,812.5 1,917,812.5
Case 2: Volume increases (other variables remain
constant)
Base case
6,625,501 euros 9,163,546 euros
Increases 2,538,045 euros

Case 2: Volume increases (other variables remain
constant) 2014F 2015F 2016F 2017F 2018F
Income Statement
Sales revenue 112,700,000 112,700,000 112,700,000 112,700,000 112,700,000
Direct COGS (84,700,000) (84,700,000) (84,700,000) (84,700,000) (84,700,000)
Depreciation (3,770,000) (3,770,000) (3,770,000) (3,770,000) (3,770,000)
Pretax profit 18,630,000 18,630,000 18,630,000 18,630,000 18,630,000
Income tax (20%) (3,726,000) (3,726,000) (3,726,000) (3,726,000) (3,726,000)
Net income 14,904,000 14,904,000 14,904,000 14,904,000 14,904,000
Net income 14,904,000 14,904,000 14,904,000 14,904,000 14,904,000
Changes in NWC (4,544,167) 0 0 0 0
Operating cash flow, in Euro 2,207,786,4 2,917,812.5 2,917,812.5 2,917,812.5 2,917,812.5
Case 3: Sales price increases (other variables
remain constant)
Base case
6,625,501 euros 6,986,942.3 euros
Increases 361,441.3 euros

Case 3: Sales price increases (other variables remain constant)
2014F 2015F 2016F 2017F 2018F
Income Statement
Sales revenue 82,900,000 82,900,000 82,900,000 82,900,000 82,900,000
Direct COGS (60,500,000) (60,500,000) (60,500,000) (60,500,000) (60,500,000)
Depreciation (3,770,000) (3,770,000) (3,770,000) (3,770,000) (3,770,000)
Pretax profit 13,030,000 13,030,000 13,030,000 13,030,000 13,030,000
Income tax (20%) (2,606,000) (2,606,000) (2,606,000) (2,606,000) (2,606,000)
Net income 10,424,000 10,424,000 10,424,000 10,424,000 10,424,000
Net income 10,424,000 10,424,000 10,424,000 10,424,000 10,424,000
Changes in NWC (3,293,667) 0 0 0 0
Operating cash flow, in Euro 1,703,177 2,217,812.5 2,217,812.5 2,217,812.5 2,217,812.5
Present value @ 15% 6,986,942.3
Case 4: Price, Cost and Volume Increases
Base case
6,625,501 euros 9,059,604.9 euros
Increases 2,434,103.9 euros

Case 4: Price, Cost and Volume increases
2014F 2015F 2016F 2017F 2018F
Income Statement
Sales revenue 97,405,000 82,900,000 82,900,000 82,900,000 82,900,000
Direct COGS (69,883,000) (60,500,000) (60,500,000) (60,500,000) (60,500,000)
Depreciation (3,770,000) (3,770,000) (3,770,000) (3,770,000) (3,770,000)
Pretax profit 18,152,000 13,030,000 13,030,000 13,030,000 13,030,000
Income tax (20%) (3,630,400) (2,606,000) (2,606,000) (2,606,000) (2,606,000)
Net income 14,521,600 10,424,000 10,424,000 10,424,000 10,424,000
Net income 14,521,600 10,424,000 10,424,000 10,424,000 10,424,000
Changes in NWC (3,835,028) 0 0 0 0
Operating cash flow, in Euro 2,258,839 2,858,062.5 2,858,062.5 2,858,062.5 2,858,062.5
Present value @ 15% 9,059,604.9
Comparasion of Possible Cases
Percent
Exchange Price Volume Cost Valuation Change in
Case Change in
rate (Lira) (Lira) (Lira) (Euros) Value
Value
Base 6.21 80.50 1,000,000 60.50 6,625,501
1: No changes 6.40 80.50 1,400,000 60.50 6,428,805 (196,699) -2.97%
2: Volume increases 6.40 80.50 1,000,000 60.50 9,163,546 2,538,045 38.31%
3: Sales price increases 6.40 82.96 1,000,000 60.50 6,986,942.3 361,441.3 5.45%
4: Price, cost and volume
6.40 88.55 1,100,000 63.53 9,059,604.9 2,434,103.9 36.74%
increase
03
STRATEGIC MANAGEMENT
OF OPERATING EXPOSURE
Strategic Management
Anticipate and influence the effect of
Objective unexpected changes in exchange rates on
a firm’s future cash flows.
Recognize a disequilibrium in parity

Motives conditions when it occurs and to be pre-
positioned to react appropriately.
Key points
Change the firm’s operating & financing
policies
Approaches
Diversify the firm’s operating & financing
structures.
Operations vs Financing base Diversifying
Diversifying Diversifying Financing

Operations Base
Objects Operating Process Capital Structures
Varying sales, location of

Raising funds in more than one capital
Approach productions facilities and raw
market and in more than one currency.
material sources.
A U.S. based -
A clothing retailer expands into the
firm issues
home goods market.
Examples A restaurant chain opens a new
more debt and
equity in the
location in a different city.
Asian market.
Strategic Management
Permits the firm to react either Does not require to predict
actively or passively, depending disequilibrium but only to
on management’s risk recognize it when it occurs
preferences, to opportunities
presented by disequilibrium
conditions
Considers how competitors are Reveals which firm would

pre - positioned in terms of be helped or hurt
their own operating exposures
Diversifying Operations: Active Management
Marketing
PPP Marginal shifts
Purchasing Power effort
Parity is in Can be strengthened
Sourcing raw materials,
disequilibrium because of price
components or finished products
competitiveness
Management Spare capacity Added

Recognizes symptoms Production runs can challenge
of disequilibrium be lengthened in one When the change is
conditions country and reduced temporary or semi -
in another permanent
Diversifying Operations: Inactive Management
#1 Effect
Beneficial portfolios effect

Even if management
does not actively alter
normal operations #2 Effect
Variability of cash flows

Probably reduced due to #3 Effect
inconsistent effect
Neutralized Operating
Exposure
Purely domestic firm in Operating Exposure
PROBLEMS
Subject to the full impact of foreign
exchange operating exposure
EXAMPLES
Intense import competition in its domestic
market from competing firms producing in
countries undervalued currencies
Purely domestic firm in Operating Exposure
PROBLEMS
Does not have the option to react to an
international disequilibrium condition
Will not be positioned to recognize that

existence of disequilibrium
Lack comparative data from its

internal sources, too late to react
Cannot quickly shift production and sales

into foreign markets
Diversifying Operations: Constraints
Constraints may limit the feasibility of

diversifying production locations.
The technology of particular industry may

require large economies of scale.
* Economies of scale refer to the cost

advantages a company gains with the increase in
production.
Example: High - tech firms, Aerospace industry

Diversifying Financing
International Fisher Effect
If interest rate differentials do not equal expected Switch financing resources
changes in exchange rates, opportunities to lower a
firm’s cost of capital will exist. The firm must be well - known in the
international investment community
● The nominal interest rate differential between
two countries is equal to the expected difference
in inflation rates between those two countries.
● The IFE can be used to predict future exchange Diversifying sources of
rates. If the IFE holds, then the exchange rate
between two currencies will change by an
capital
amount equal to the difference in interest rates Lower a firm’s cost of capital and
between the two countries. increase its availability of capital
Example
04
Proactive Management of
Operating Exposure
Most common proactive policies
01 02 03
Matching currency cash flows Risk sharing agreements Back - to - back or parallel loans
04 05
Cross currency swap Contractual approaches
Matching Currency Cash Flows
One way to offset an anticipated continuous long-term
exposure to a particular currency is to acquire debt
denominated in that currency.
Goods and services
Canadian dollars
PREDICTABLE
and CONSTANT
U.S Corporation Canadian Buyers
eb t
rs d
d o l la
ad i an
Ca n
Goods and services
Canadian dollars

Canadian dollars debt
Cash - Flow Matched

Financial cash outflows
Operational cash inflows
U.S Corporation Canadian Bank

Canadian materials
Goods and services
Canadian dollars
U.S Corporation Canadian Suppliers &

Buyers
Natural Hedge
Operational Cash Outflows
Operational Cash Inflows
U.S Corporation Canadian Suppliers &

Buyers
Mexican Suppliers
s
t e rial
a
ca nM
M ex i
Goods and services
Canadian dollars

Currency Switching
Risk – Sharing Agreements
Risk sharing is a contractual arrangement in which the buyer
and seller agree to “share” or split currency movement
impacts on payments between them.
All purchases will be made at
the current exchange rate as
long as the spot rate on the date
of invoice is between ¥115/$
and ¥125/$.
FORD MAZDA
If the exchange rate fall out of this
range, Ford and Mazda will share
the difference equally.
FORD MAZDA
The spot exchange rate: ¥110/$.
The agreed payment range: ¥115/$

and ¥125/$.
The difference of the exchange rate:
(¥5/$)
Agree to share on the difference of
the exchange rate:
(¥5/$)/2 = (¥2.5/$)
FORD MAZDA
FORD would pay to Mazda:
[ = $222,222.22
Without the risk sharing agreement:

[ = $227,272.73
FORD’s Savings:
$227,272.73 - $222,222.22 = $5,050.51
A reduction in cost increase
FORD MAZDA
Risk – Sharing Agreements
In use for 50 years
On world market
During 1960s
Become rarity – Bretton
Woods Agreement
During 1970s
firms with long-term customer-supplier
relationships across borders have returned to
some old ways of maintaining mutually
beneficial long-term trade
Back – to- Back or Parallel Loans
A back-to-back loan, also referred to as a parallel loan or
credit swap, occurs when two business firms in separate
countries arrange to borrow each other’s currency for a
specific period of time.
The Foreign Exchange Market
Conducted outside
Spot quotations may be used as
the reference point for
determining the amount of
funds to be swapped.
Such a swap creates a
covered hedge against
exchange loss, since each
company, on its own books,
borrows the same currency
it repays.
Awesome
words!
British pounds Dutch euros
loan to Dutch’s loan to British’s
British subsidiary Dutch subsidiary
Dutch euros
loan to British’s
Dutch subsidiary
British pounds
loan to Dutch’s
British subsidiary
If the pound dropped by more than 6% for as long as 30 days. The

same amount of British pounds can be converted to less Dutch
euros.
British pounds Dutch euros
loan to Dutch’s loan to British’s
British subsidiary Dutch subsidiary
British parent might decide to advance additional pounds to the

Dutch subsidiary to bring the principal value of the two loans back
to parity.
Parallel Loans’ Fundamental Impediment
1st 2nd
Difficult for a firm to find a One of the parties will fail to
partner, termed a counterparty, for return the borrowed funds at the
the currency, amount, and timing designated maturity
desired.
Cross – Currency Swaps
A cross-currency swap resembles a back-to-back
loan except that it does not appear on a firm’s
balance sheet.
Up to 30 years!!!
Equivalent amount
A Firm A Swap Dealer

Middleman
Firm A Firm B
d
rs e arn e
e d o lla
t wi th th
ack d eb
Pa y
b U.S Financial Market
Earn U.S dollars
Japanese Firm
U.S Buyers
Yen – denominated debt services payment
“paying yen” and “receiving dollars”
Middleman
Japanese Firm Firm B

U.S Dollar – denominated debt services payment
“paying dollars” and “receiving yen”
Middleman
Japanese Firm Its Counterparty

Swap dealers arrange most swaps on a blind basis,
meaning that the initiating firm does not know who is on
the other side of the swap arrangement.
Middleman
Japanese Firm Its Counterparty

The initiating firm views the dealer or bank as its counterparty.
Contractual Approaches: Hedging
the “unhedgeable”
Contractual strategies: long-term currency option positions
— hedges designed to offset lost earnings from adverse
exchange rate changes
The predictability of the firm’s The predictability of the firm’s
future cash flows competitors’ responses to exchange
rate changes
Ability
To hedge
“unhedgeable”
Merck Company
The predictability of the firm’s The predictability of the firm’s
future cash flows competitors’ responses to
exchange rate changes
relatively predictable long-run
revenue streams due to the product- As a U.S.-based exporter to foreign
niche nature of the pharmaceuticals markets, markets in which sales
industry levels by product are relatively
predictable and prices are often
regulated by government, Merck
can accurately predict net long-
Ability term cash flows in foreign
currencies five and ten years into
To hedge the future.
“unhedgeable”
Merck has purchased over-the-counter (OTC) long-term put options on foreign currencies versus the
U.S. dollar as insurance against potential lost earnings from exchange rate changes.
THE END
THANKS FOR
LISTENING

Operating Exposure Presentation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Operating Exposure Presentation

Uploaded by

Copyright:

Available Formats

OPERATIN

Measures changes in PV resulting from changes in future

Identify strategic moves or operating techniques to enhance

Actual, total value

Contract General in nature Specific in nature Specific in nature

Value depends on variation Value depends on changes Value depends on

Difficult because difficult

Operating exposure Cash flows

● net of cash inflows and A/R A/P

purchases components from Aidan

 Aidan Turkey is clearly Turkish lira-functional,

 Aidan Ireland is, therefore, obviously euro-functional.

Forecasting and analyzing all Forecasting and analyzing

Exchange rate changes in the Over longer term, the more

o  The operating exposure of each individual business unit then needs to

Effects Aidan Malaysia Aidan Turkey Aidan Ireland

Effects on RM Appreciates Appreciates Appreciates

Effects on Lira May stay the same Appreciates Appreciates

Effects on Euro Converts to fewer RM No immediate impact Depreciates

Operating Cash FLow Financing Cash Flow

Intercompany Intracompany Intercompany

Operating Cash FLow Financing Cash Flow

Intercompany Intracompany Intercompany

Each of these cash flows can occur:

Operating Exposure’s Features

Long - run Inevitably Management

Expected Changes Unexpected Changes

Management Budgeted financial statements

Amortize debt should

Investor Information is widely known and

Broader Barely sensitivity of the firm’s in:

Expected Changes Unexpected Changes

Short Run Long Run

● Cash flow expected in two-to-five

● The firm may not be able to adjust

● Primary problem: The reactions of

● Market value may change

Operating cash flow (OCF) is a measure of the amount of cash generated

=> This is the value of a business.

The operating exposure is in the long - term.

Operating Cash Cost

Aidan Turkey is a subsidiary of Aidan Corporation.

● Sales volume: 1,000,000

Decrease 196,699 euros

Increases 2,538,045 euros

Increases 361,441.3 euros

Increases 2,434,103.9 euros

1: No changes 6.40 80.50 1,400,000 60.50 6,428,805 (196,699) -2.97%

2: Volume increases 6.40 80.50 1,000,000 60.50 9,163,546 2,538,045 38.31%

Recognize a disequilibrium in parity

Diversifying Diversifying Financing

Varying sales, location of

Considers how competitors are Reveals which firm would

Management Spare capacity Added

Beneficial portfolios effect

Variability of cash flows

Will not be positioned to recognize that

Lack comparative data from its

Cannot quickly shift production and sales

Constraints may limit the feasibility of

The technology of particular industry may

* Economies of scale refer to the cost

Example: High - tech firms, Aerospace industry