R.J. Reynolds International Financing Case Study

MGT 244

2/5/2017

Yilun Zhang

861306915

R.J. Reynolds International Financing Case Study

According to the passage, the RJR was going to do the financing of its $4.9 billion acquisition of Nabisco Brands Inc. in 1985.  In order to finance this acquisition successfully and efficiently, the RJR was going to issue the $1.2 billion of 12 year notes. Moreover, it would be going to issue the $1.2 billion in preferred stock. In the giving situation, the RJR had already funded $1.5 billion of the acquisition, and still had $1 billion more to finance.

However, in the $1.5 billion that had been funded, $500 million came from cash and the remaining was come from bank borrowings and other commercial papers.  These borrowings added to the debt that the RJR had issued in 1984. Thus, it would cause the debt ratings of the RJR to drop down to A. The remaining $1 billion financing could make the RJR’s debt rating worse and worse, so that the company should take a good consideration about how to finance the remaining $1 billion. The following are the strategies that the RJR would deal with the financing:

1, Issuing the Eurodollar Bond  

In the case, at that time, The RJR would issue the $100 million of five-year noncallable Eurodollar bonds at 100.125% of par, with an annual coupon of 10 1/8% and fees of 1 7/8%.

Thus, we can find that the price, which is 100.125% of par, and the investment banking fees of 1.875% with the annual coupon rate of 10.125%. So that we can calculate out the all-in cost of 10.6% with the 45 basispoints against U.S Treasuries.

2, Issuing the Euroyen Bond with the forward contract

In this case, the RJR could also issue ¥25 billion five-year noncallable Euroyen bonds at a price of 100.25% of par, with an annual coupon of 6 3/8% and fees of 1 7/8%.

We can know that the price, which is 100.125% of par, and annual coupon rate of 10.125% and the investment banking fees of 1.875%.

Using the outright rates of bid and offer in the exhibit 8, we can calculate the cash flow of Yen and Dollar for the next 5 years:

(In Billion)