U.S Semi-conductors is a company that specializes in the manufacture of semi-conductors. The company’s headquarters is located in Santa Clara, California. As part of the company’s growth strategies, U.S Semiconductors seeks to expand into the United Kingdom market. The company intends to set up a fully fledged facility in the UK to replace its initial small time operations in the area. The major reason for this expansion into the UK market is to stay competitive and relevant in comparison to the American firms. A location 50 miles away from Heathrow was chosen to be the appropriate site to set up the UK branch of US Semi-Conductor Company. Before setting up the company in the UK, it was imperative to come up with a proper business plan. According to the business plan, a special warehouse was to be constructed. The warehouse would be climate controlled and able to protect the chips adequately. Furthermore, the company was to acquire small trucks as well as all the necessary equipment needed to control the inventory.
Before initiating operations, the company received advice from several fronts. To begin with, the legal and tax department offered logistical issues that would help the company minimize costs in tax and other legal costs. The company was advised to consolidate all its assets as a corporation under the name of US semi-conductors Ltd. It was also advised that the entire enterprise be capitalized at the least possible equity investment. Finally, all the remaining assets including assets classified as high value should be funded through debts.
The finance department was tasked with the responsibility of sourcing for funds to initiate the project in a new location. The U.S Semiconductor Finance Department was in charge of all the activities of the company that involved finances both abroad and at home. They also advised the company on risk management strategies. The department was able to solicit finance from several commercial banks by forwarding their proposals through the assistant treasurer, Marcel Godfrey. The banks approached for this purpose were those based both in the USA and UK. It was finally decided that the company would utilize the plain vanilla technique of financing rather than the complex leasing agreement technique.
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After analysis, two debt financing strategies emerged. Both strategies included a powerful comfort letter as well as the documentation that was standard. Each of these options provided a five-year repayment period with a fixed repayment rate. However, one option offered repayment in US dollars at a fixed rate of 8% p.a. While the other option provided repayment in pound sterling at a rate of 12% p.a. These two options raised enormous differences within the company on which was the best option. Local management favored the pound sterling as it evaded exchange risks. Furthermore, they favored the hedging principle. Staffers at the headquarters, however, preferred the US dollar repayment citing the reason that the company was in a business that was dollar-driven. Furthermore, it was determined that the dollar option was cheaper. The director of foreign exchange, however, advised on borrowing in pound sterling. The director figured that the value of the pound sterling was predicted to become weaker corresponding to drop in oil prices. There were those who were not for either option. They suggested that half of the debt should be in dollars and the other half in pounds sterling.
In conclusion, the prospect to set up a branch of the company in the United Kingdom is agreeable and one that stands to benefit the company greatly. However, an appropriate debt repayment procedure is imperative for the success of the company in the UK. The compromise option seems to be the best for the company. This is because, by hedging all the shipments from the warehouse in Santa Clara in US dollars then forwarding against the UK pound sterling using three month contracts is highly profitable.