I’m working on a finance discussion question and need an explanation and answer to help me learn.
Dozier Industries (A)
1. Exactly what is Mr. Rothschild’s exposure? If the price of the pound falls from its current price
of $1.4480, will Rothschild win or lose?
2. According to Exhibit 5, has Rothschild’s profit or loss changed over the last day?
3. Based on the most recent information you can find, what is the expected future spot rate for
April 14, 1986?
4. Of the two hedging techniques, the forward and the spot hedges, which is more profitable? Do
they have equivalent risk?
5. What should Richard Rothschild do?
Dozier Industries (B)
1. If Mr. Rothschild elects to use an option hedge, exactly how should he do it? Should he buy a
call, buy a put, sell a call or sell a put?
2. Which option or options from Exhibit 2 would you use? Why?
3. How is the option hedge better or worse using a forward contract? Which hedging technique
should Mr. Rothschild use?
4. Looking back on his situation on December 3, 1985, should Mr. Rothschild have used a
forward hedge at that time? An option hedge?
Bidding for Hertz
1. How does the dual-track process used by Ford to initiate “considerations for strategic
alternatives affect the bidding process for Hertz?
2. In what ways does hertz conform or not conform to the definition of an “ideal LBO target”?
Do you believe Hertz is an appropriate buyout target?
3. Strategically, what value-creating opportunities can the sponsors exploit in this transaction?
4. How realistic are the key assumptions that underlie the bidding Group’s projections in case
Exhibits 8, 9, and 10? Which assumptions are most likely to have the largest impact on
returns?
5. Based on the base-case estimates in case Exhibits 8, 9, and 10 and your estimate(s) of terminal
value if the sponsors put up $2.3 billion in equity, what return can they expect to earn?
6. If Carlyle desires a 20% target return on its equity investment, does your analysis suggest that
$2.3 billion is too much to pay, or can it afford to pay more – in either case, by how much?
7. What is the market-required rate of return for this investment, and why might this differ from
the sponsors’ target return?
8. What is the value of Hertz using the equity residual method of valuation?
9. Assess the amount ford is likely to receive if it pursues its IPO alternative versus being bought
by a private equity group.
10. What factors would be considered in assessing whether the consortium’s bid is likely to beat
that of a rival group?
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