General Motors: The World's Largest Automaker

Question 1 

Analysist hired by General Motors should decide how and whether to manage the interest rates exposure of the company financing. The thing the analyst should consider is available products to hedge, future IR changes, and existing exposure. No History derivative position altered the exposure of IR until 1989 when the manager of Capital Market group had his proposal approved by BoD Notified public in 1990 yearly statement Plan to raise four hundred million by 1992.

Details of debt 

TTM: 5-Year

FV: $400

Coupon: (7 + 5/9) %

Semi-annual

PV: 999.976 per 100

I/Y: 7.75%

Question 2 

Yes, the company is likely to earn a profit when the prices of assets skyrockets.

Question 3 

What might be done differently if Mr. Bello’s (GM’s) goal is to insulate GM against interest rate risk rather than potentially reducing financing costs ?

The company should rationalize financial Hedging Risks 

Management of General Motors should rationalize the company’s hedging financial risk to reduce the future bankruptcy which would cost his company. The situation applies to small companies especially his which lack access to enough capital. It can become elusive making it useful to transfer all the risk to a manageable position while enabling him to expand in the market better by diversification for market capital. Also, management of GM needs to use hedging to increase their debt capacity which results in gaining of a desired financial equity, debt, and a proper capital structure. When Mr. Bello runs his businesses, hedging helps in reducing firm tax liability since hedging funs equal to premium insurance for tax deductible.

Annuities should be purchased 

When purchasing annuities, it is important for the manager of GM to know the risks involved in this type of investment. People with annuities end up buying insufficient life insurance which is not productive enough. The older people retain high numbers of life insurances. It also becomes expensive since people with annuities are asked to buy life insurance at that time. Annuities contain clauses that issue out low repayment guaranteed plans.

Introducing rationality 

After the company buys the annuities that are reflected in the border scope, his investment becomes safer. This investment again reoccurs when the person reinvests $10000 to the company. This ensures their security in their investor seeking some of their money. They also know their metrical values as they look for another people from excess investing

Question 4 

According to all the open chances given to Mr. Bello, it is worth to consider rationality and annuities as a recommendation. It gives him an option of deducting down costs especially loans since the expenses presented, but the interests eat up all the remaining profit balance resulting in a liquidity crisis. All these problems are handled by hedging. People like Mr. Bello needs to get the desired source of funds which meets the hedging specification of the future higher profits. Mr. Bello’s new company financial position does not allow him to use GM sources of funding which may consume all of his profits leading to undesirable situations and losses.

Question 5 

Below is the equation of finding “ synthetically re-engineered” fixed-rate financing.”

V= $400 M (1+ $7787M) 18 / 5.6(560)

N f * = 4.444