Memo: Dessert Valley brewery Limited: Ferguson’s Proposal Case Solution & Answer

Memo: Dessert Valley brewery Limited: Ferguson’s Proposal Case Solution

1.1        Impact of Currency Fluctuations

            The analyst calculated the impact of currency fluctuations by using the interest rate parity formula to get the most appropriate answers. Furthermore, two scenarios were considered in the analysis; one is that if the CD strengthens in front of USD and the second is the weaker position of CD.

            In addition, the findings suggested that if the CD strengthens, it would be less effective and less profitable for the company since, the company will have to receive less amount in exchange of CD. On the other hand, the second case suggested that if the position of CD weakens, then it would be more beneficial for the company. Since, the company will be able to receive more funds.

            Moreover, the first case suggests that the company can earn almost 377,000 to 314,000 CD over the proposed time period of the project. However, the discount rate of the American economy was assumed 18% in the Interest Rate Parity Formula.

            Finally, the last scenario suggests that the company can receive almost 417,000 to 347,000 CD, if the CD declines its value and USD becomes stronger. In a nutshell, it can be concluded that the company is exporting goods and in this condition, low home currency rates are more feasible.

2          Qualitative Analysis/Non-Financial Analysis

            In this section, the analyst has evaluated the performance of the company as compared to its competitors and the internal competencies of the company. Moreover, the analyst also highlighted the accounting treatment of some crucial factors.

2.1        Accounting Treatment of Upfront Fee

            The upfront fee is being paid in the first year of contract. Therefore, it will be considered as an inflow. For instance, the analyst used the upfront fee as inflow and added it into the first years profit and afterwards, the analyst discounted that amount on the given rate.

            However, the upfront fee has several types of accounting treatment, since the nature of this head differs from situation to situation. In our case, the analyst considered it as income. Moreover, the account can be treated as deferred income. However, to keep the analysis simple, the analyst assumed it as income of the company.

2.2        Accounting Treatment of Currency Sales Transactions

            The currency sales transactions will be treated in the same traditional way i.e. if the company profit from the weaker position of CD, this will be noted as translation gain or exchange gain. On the other hand, if the company faces a loss as a result of stronger CD position in front of USD, then the loss will be recorded as translation loss or exchange loss.

2.3        Competitive Performance of Desert Valley

            The performance of the company as compared to its competitors is acceptable, as the company is operating according to the industry trends. However, there are some improvements, which are required in the company’s internal structure. Since, the industry sales growth trends are higher than the company’s; the industry is expecting to have a growth of almost 8% for 2013 and 2014 and the company is growing its sales by almost 5 to 6%,which is lower than the industry trends. Finally, it can be said that the performance is a bit lower than the industry; but still, it’s acceptable and the company has to cover up these weaknesses.

2.4        Pros and Cons of the Contract’s Terms and Conditions

            The company has several pros and cons in  the proposal; but the company has to pursue this contract, because of its attractiveness. The first advantage of the agreement deed is that there is no minimum requirement limit from Ferguson; this is a good factor for the company, as the company can sell the excess inventory in its own stores…………….

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