Global Energy Management Institute
International Financial Risk Management
R.J. Reynolds International Financing HBS Case 9-287-057
The case is set in the context of RJR’s 1985 financing of its $4.9 billion acquisition of Nabisco Brands Inc. To finance the acquisition, RJR was proposing the issue of $1.2 billion of 12 year notes and the same amount in preferred stock. It had already funded $1.5 billion of the acquisition leaving $1 billion more to finance.
Challenges facing RJR: Of the $1.5 billion that had been funded, $500 million came from cash and the remaining was through bank borrowings and commercial paper. These borrowings added to the debt that RJR had issued in 1984 and brought their debt ratings down to A. The
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(1,593,750,000 + 25,000,000,000) / (1.071)^5 which converted to dollars at the spot should equal the present value of dollar receipts discounted at 10.92% so the dollar payments are determined by solving for: PV of yen (from above) converted into dollars at the spot rate of 236.90 = $ Payment / 1.1092 + $Payment / (1.1092)^2 + …. + ($Payment + PV of yen converted into dollars) / (1.1092)^5) Effectively this means that RJR receives 24,593,750,000 / 236.90 = $ 103,814,900.80 (which is different from the dollar value in year 0 shown above) and pays $11,182,202.07 for 5 years and in addition repays the $ 102,401,117.83 in year 5. The all-in cost (IRR) of this option is 10.55%. (The case points out on page 5 that one way to think about this is to see that compared to the yen cost of 6.769% for Euroyen bonds, the 7.1% that RJR is receiving is 33 bp higher, so the