Date- 05/04/21
R.J. Reynolds International Financing
1. Examine the types of securities being recommended to RJR as financing alternatives.
Are they well suited for RJR’s current liability structure and overall financing
programme? Why or why not?
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R.J. Reynolds is a major international consumer product company that operates in tobacco,
food, and beverages products. The company offers products in all segments of the market, and
It was ranked 23rd in the 1984 Fortune 500 list.
The company has a long-term debt of 1.484 billion and 4.478 billion in common stockholder
equity. The company also repurchased its shares several times, First 10 million worth of stocks
in November 1984 and then again 7.9 million worth of stocks in August 1985. Looking at the
repurchase program, I feel that the company prefers debt more than equity.
The types of securities being recommended to RJR as financing alternatives are as followed:
5-year Euro-Dollar non-callable bonds of 100 million at a price of 100.125% with a
coupon of 1.125% annually and fees of 1.875%. For this one, no hedging instrument is
needed for foreign exchange exposure. It has relatively higher liquidity in the market and
comes with a higher coupon rate.

5-year Euro-Yen non-callable Bonds of ¥ 25 billion at a price of 100.25% with a coupon of
6.375% annually and fees of 1.875%. These bonds are exposing the company to foreign
exchange risk. The hedging options available for foreign exchange risk is forwards and
currency swaps.

5 year Yen/Dollar dual currency non-callable Euro bonds ¥ 25 billion at a price of 101.5%
with a coupon of 7.75% annually and fees of 1.875%. Dual currency bonds are hybrid
instruments with obligations payment over its life is in two currencies. The borrower of a
dual currency bond makes coupon payments in a certain currency but redeems the
principal at maturity in another currency in an amount fixed at the time of the issue of
the bonds. The hedging instruments available for this are Forex forward contracts for Yen
liability 5 years Dollar forward contract and for Dollar liability Yen forward contract to
cover annual Yen coupon. The problem associated with this is market liquidity is low, and
it will give the company additional foreign exchange exposure.
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The best suitable financing option for RJR’s, which I feel is Euro-Yen non callable bonds. I
recommend converting Euro-Yen liability to dollar liability with a currency swap.
It has the highest rate of IRR & it will help in reducing the currency risk aswell.
.
2. Assuming RJR were to choose among only the alternatives presented in the case,
which would you recommend? Show your work for any calculations and justify your
choice.
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I would recommend choosing Euro-Yen Bond. As mentioned above it would help company
against the currency risk exposure. A Euro-Yen bond will only be feasible when combine with
some hedging tool which can be in the form of a currency swap or a forward contract. This can
be used as a tool to convert Yen payments to Dollar payments. As per the calculations the all in
cost of this option is 10.64%. This will help in hedging into Dollars using forward contracts.
Therefore reducing risk of large losses.
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https://www.coursehero.com/file/88542485/RJRdocx/
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