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Question

1.Why did Swatch Group CEO Nick Hayek Jr. have such a strong reaction to the action of the SNB proclaiming that

"Jordan is not only the name of the SNB president, but also a river and today's SNB action is a tsunami"?

2. Explain the difference between the nominal and real exchange rate. Use the excel file accompanying this case to assess the effects of the following scenarios on the stock price of Swatch Group (see picture):

(a) A permanent 10% appreciation of the Swiss franc beginning in 2015.

(b) A permanent 10% appreciation of the Swiss franc beginning in 2015 along with 10% foreign (all other countries) inflation in 2015 (and zero inflation thereafter).

(c) A permanent 10% appreciation of the Swiss franc beginning in 2015 along with 9.1% Swiss deflation in 2015 (and zero inflation thereafter).

(d) No change in the value of the Swiss franc, but 9.1% Swiss deflation in 2015 (and zero inflation thereafter). Based on your calculations above discuss the importance of changes in the nominal and real exchange rate of the Swiss franc on Swatch's stock price.

3. Why did the SNB adopt the ceiling policy in the first place?

4. Use a supply-and-demand diagram of the foreign exchange market for the Swiss franc vs the Euro to explain the policy pursued by the SNB to maintain the ceiling. What was the result of this policy on the Swiss monetary base and money supply?

5. Why do you think the SNB ended the ceiling policy? 


excel.png

excel.png

Inputs
2015
2016
2017
2018
2019
Long-term
Assumptions
Notes
Swiss Inflation
Real Revenue and Cost Growth
Foreign Inflation
0
0
0
0.054 Assumption, based on recent salescost numbers in case [Ex 7)
O
Long-run FCF Growth Rate
0.031 Assumption
Cumulative Appreciation (vs. 2014)
O
0
Swiss Sales Fraction
0.1 From case [Ex 6)
Swiss Costs Fraction
0.5 Assumption, reasonable given personnel breakdown given in case (p. 4)
ANWO/Revenue
0.052 Assumption, based on recent cost numbers [Ex 7)
Model (millions of CHE]
APP&E/Revenue
0.051 Assumption, based on recent cost numbers [Ex 7)
2014
2015
2016
2017
2018
2019
Steady-State
Amortization Revenue
0.003 Assumption, based on recent cost numbers [Ex 11)
Swiss Revenue
395
944
995
1048
1105
165
Tax/EBIT
0.2 From case (Ex 7]
Foreign Revenue (constant CHF)
8059
8494
395
9436
9945
10482
Real Discount Rate (WACC)
0.062 Assumption
Foreign Revenue (actual CHF]
8059
8494
8952
9436
3945
10482
2014 Non-Current Liabilities
765 Millions of CHH, from case (Ex 7)
Total Revenue
3954
3438
9947
10484
11050
11647
11647
2014 Revenues
3954 Millions of CHF. from case [Ex 7)
2014 Costs
7188 Millions of CHF, from case [Ex 7)
Swiss Costs
3594
3788
3993
4208
4435
4675
Number of Bearer Shares (UHF
80.3 Millions, from 2014 Swatch financial statement
Foreign Costs [ constant CHF]
1594
3788
668
4208
4435
4675
Bearer Share Equity Fraction
0.8 From 2014 Swatch financial statement
Foreign Costs (actual CHF)
359
3788
3993
4208
4435
4675
Total Costs (including depreciation
7188
7576
7985
8416
8871
9350
1350
Results
Total Present Value of FCF
18131
EBIT
1861
1962
2068
2179
2297
2297
Value of Equity
17366
NOPAT
1489
1570
1654
1744
1838:
1838
Bearer Share Price (UHP)
459
ANWC
491
517
545
575
606
606
APP&E
481
507
535
564
594
594
FCF (NOPAT - ANWC - APP&E +
Amortization
545
575
606
639
673
673
Terminal Value
21077
Discount Rate
0.062
0. 128
0. 198
0.272
0.351
0.35
PV of FCF
514
510
506
502
498
15602

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