Problem 20.1 Nikken Microsystems (A) &ssume "i''en Microsystems has sold nternet servers to Telecom )spa*a for +,- .ayment is due in 3 months and ill be made ith a trade acceptance from Telecom Telecom )spa*a &cceptance- The acceptance fee is $-0 per annum of the face amount of the note- This acceptance ill be sold at a 10 per annum discount- 2hat is the annualied percenta4e all5in5cost in euros of thi s method of trade financin4 Assumptions Face amount of sale Maturity, days Trade acceptance fee, per annum Discount rate on sale of acceptance, per annum All#in#$ost o% &ra'e Acceptance Face amount of the receivable Less trade acceptance fee (amount financed financed x acceptance acceptance fee x (days/36! ! Less discount on the sale of acceptance (amount financed x discount rate x (days/36!! "et proceeds Annuali*e' percenta+e all#in#cost (A$) (acceptance fee # discount! / (amount received! received! x (36/$%! (36/$%! Values € 700,000 0 1.000! ".000! € 700,000 (1,70) (7,000) € 1,20 .0-! Problem 20.2 Nikken Microsystems () &ssume that "i''en Microsystems prefers to receive 7-8- dollars rather than euros for the trade transaction described in problem 9- t is considerin4 to alternativesA $! t can sell the acceptance for euros at once and convert the euros immediately to 7-8- dollars at the spot rate of exchan4e of :$-/+B or 9! t can hold the euro acceptance until maturity but at the start sell the expected euro proceeds forard for dollars at the 35month forard rate of :$-9/+a- 2hat are the 7-8- dollar net proceeds received at once from the discounted trade acceptance in option $ b- 2hat are the 7-8- dollar net proceeds received in 3 months in option 9 c- 2hat is the brea'even investment rate that ould e>ualie the net 7-8- dollar proceeds from both options d- 2hich option should "i''en Microsystems choose Assumptions Face amount of sale Maturity, days 8pot exchan4e rate, :/+ Forard exchan4e rate, 35months, :/ + Trade acceptance fee, per annum Discount rate on sale of acceptance, per annum a. /at are te 'ollar procee's recei3e' at once4 Face amount of the receivable Less trade acceptance fee (face amount x acceptance fee x (days/36! ! )uro proceeds 8pot exchan4e rate, :/+ 78 dollar proceeds, no b. /at are te 'ollar procee's recei3e' in - monts un'er option 24 Face amount of the receivable Less trade acceptance fee (face amount x acceptance fee x (days/36! ! )uro net proceeds 35month forard exchan4e rate, :/+ 78 dollar net proceeds received in 35months c. reake3en rein3estment rate 78 dollars received no, part a! 78 dollars received at end of ; days, part b! =rea'even reinvestment rate of : no to e>ual : in 3 months (per annum! Values € 700,000 0 1.00 1.02 1.000! ".000! € 700,000 (1,70) 6 € 5,20 1.00 5,20 € 700,000 (1,70) 6 € 5,20 1.02 712,21 : : '. /ic option soul' Nikken Microsystems coose4 f "i''en Microsystems? opportunity cost of capital is %0, it should be indifferent financially beteen the to options @oever, sellin4 the acceptance at once, option $, improves "i''en?s li>uidity and removes the debt that otherise ould be financin4 the acceptance from "i''en Microsystem?s balance sheet- 6;%,9< $9,9$< 5.000! Problem 20.- Moto+u**ie (A) Moto4uie exports lar4e5en4ine motorcycles (4reater than cc! to &ustralia and i nvoices its customers in 7-8- dollars- 8ydney 2holesale mports has purchased :3,, of merchandise from Moto4uie, ith payment due in six months- The payment ill be made ith a ban'ersG acceptance issued by harter =an' of 8ydney at a fee of $-<0 per annum- Moto4uie has a ei4hted avera4e cost of capital of $0- f Moto4uie holds this acceptance to maturity, hat is its annualied percenta4e all5in5cost Assumptions Calue of shipment redit terms, days =an'ers? acceptance fee Moto4uie?s 2&, per annum All#in#cost o% ankers Acceptance Face amount of ban'ers? acceptance Less acceptance fee for 65month maturity ( face amount x acceptance fee x (term/36!! &mount received by ndian Epportunity cost of capital Moto4uie?s 2& (amount received x 2& x $%/36! &nnualied percenta4e all5in5cost (&! (acceptance fee #opportunity cost! / (amount received! x (36/$%! 6 Values -,000,000 150 1.70! 10.000! 6 -,000,000.00 (2,20.00) 6 2,7-,70.00 6 1"5,57.0 11.7! Problem 20." Moto+u**ie () &ssumin4 the facts in problem $, =an' of &merica is no illin4 to buy Moto4uieGs ban'ersG acceptance for a discount of 60 per annum- 2hat ould be Moto4uieGs annualied percenta4e all5in5cost of financin4 its :3,, &ustralian receivable Assumptions Calue of shipment redit terms, days =an'ers? acceptance fee Moto4uie?s 2&, per annum Discount rate on sale of acceptance, per annum All#in#$ost o% ankers Acceptance Face amount of ban'ers? acceptance Less acceptance fee for 65month maturity Less discount on sale of acceptance &mount received by Moto4uie &nnualied percenta4e all5in5cost (&! (acceptance fee # discount! / (amount received! x (36/$%! 6 6 6 Values -,000,000 150 1.70! 10.000! .000! -,000,000.00 (2,20.00) (0,000.00) 2,55-,70.00 5.02! Problem 20. Nakatomi &oyota "a'atomi Toyota buys its cars from Toyota Motors578&, and sells them to 7-8- customers- Ene of its customers is )co@ire, a car rental firm hich buys cars from "a'atomi Toyota at a holesale price- Final payment is due to "a'atomi Toyota in 6 months- )co@ire has bou4ht :9, orth of cars from "a'atomi, ith a cash don payment of :1, and the balance due in 6 months ithout any interest char4ed as a sales incentive- "a'atomi Toyota ill have the )co@ire receivable accepted by &lliance &cceptance for a 90 fee, and then sell it at a 30 per annum discount to 2ells Far4o =an'- a- 2hat is the annualied percenta4e all5in5cost to "a'atomi Toyota b- 2hat are "a'atomiGs net cash proceeds, includin4 the cash don payment Assumptions Face amount of sale (first payment of <! Don payment, 90 of payment .eriod for financin4, days Trade acceptance fee Discount rate on sale of acceptance, per annum 6 6 All#in#$ost o% &ra'e Acceptance Face amount of sale Less cash don5payment &mount for financin4 Less trade acceptance fee (amount financed x acceptance fee x (days/36! ! Less discount for the period (amount financed x discount rate x (days/36!! .roceeds to "a'atomi Toyota 6 6 Values 200,000 "0,000 150 2.000! -.000! 200,000.00 ("0,000.00) 10,000.00 (1,00.00) 6 a. Annuali*e' percenta+e all#in#cost (A$) (acceptance fee # discount! / (amount received! x (36/$%! (2,"00.00) 1,000.00 .125! b. Net cas procee's to Nakatomi &oyota Don payment .roceeds of acceptance Total cash proceeds : 6 1, $<6,- 1,000.00 Problem 20. 8or%aitin+ at maru 9il (Ni+eria) 7maru Eil of "i4eria has purchased :$,, of oil drillin4 e>uipment from Junslin4er Drillin4 of @ouston, Texas- 7maru Eil must pay for this purchase over the next five years at a rate of :9, per year due on March $ of each year- =an' of Iurich, a 8iss forfaiter, has a4reed to buy the < notes of :9, each at a discountThe discount rate ould be approximately %0 per annum based on the expected 35year L=EH rate plus 9 basis points, paid by 7maru Eil- =an' of Iurich also ould char4e 7maru Eil an additional commitment fee of 90 per annum from the date of its commitment to finance until receipt of the actual discounted notes issued in accordance ith the financin4 contract- The :9, promissory notes ill come due on March $ in successive years- The promissory notes issued by 7maru Eil ill be endorsed by their ban', La4os ity =an', for a $0 fee and delivered to Junslin4er Drillin4- &t this point Junslin4er Drillin4 ill endorse the notes ithout recourse and discount them ith the forfaiter, =an' of Iurich, receivin4 the full :9, principal amount- =an' of Iurich ill sell the notes by re5discountin4 them to investors in the international money mar'et ithout recourse- &t maturity the investors holdin4 the notes ill present them for collection at La4os ity =an'- f La4os ity =an' defaults on payment, the investors ill collect on the notes from =an' of Iuricha- 2hat is the annualied percenta4e all5in5cost to 7maru Eil of financin4 the first :9, note due March $, 9$$ b- 2hat mi4ht motivate 7maru Eil to use this relatively expensive alternative for financin4 Assumptions Face amount of the note due March $, 9$$ issued by 7maru 35year L=EH rate, per annum =asis point spread, per annum Total discount rate, per annum =an' of Iurich commitment fee, per annum La4os ity =an' endorsement fee, per annum /at is te all#in#cost o% %or%aitin+4 Face amount of note Less La4os ity ban' endorsement fee Less =an' of Iurich commitment fee for one year Less discount on note at L=EH plus spread "et proceeds 6 6 6 Annuali*e' all#in#cost o% %actorin+ ( total interest and fee costs / face amount of note ! 7maru Eil ould probably be motivated to use a forfaiter because its credit orth is too lo to >ualify for more normal financin4- "ote that the $$0 annual costs are paid by 7maru Eil itself 55 the importer, rather than by Junslin4er Drillin4, the exporter- Values 200,000 .000! 2.000! 5.000! 2.000! 1.000! 200,000 (2,000) (",000) (1,000) 175,000 11.000! Problem 20.7 unny $oast :nterprises (A) 8unny oast )nterprises has sold a combination of films and DCDs to @on4 Kon4 Media ncorporated for 78:$,, ith payment due in six months- 8unny oast )nterprises has the folloin4 alternatives for financin4 this receivableA $! 7se its ban' credit l ine- nterest ould be at the prime rate of <0 plus $< basis points per annum- 8unny oast )nterprises ould need to maintain a compensatin4 balance of 90 of the loanGs face amount- "o interest ill be paid on the compensatin4 balance by the ban'B or 9! 7se its ban' credit li ne but purchase export credit insurance for a $0 fee- =ecause of the reduced ris', the ban' interest rate ould be reduced to <0 per annum ithout any points- a- 2hat are the annualied percenta4e all5in5costs of each option b- 2hat are the advanta4es and disadvanta4es of each option c- 2hich option ould you recommend Assumptions Face amount of receivable Maturity, days =an' prime rate 8pread over prime rate on credit line =an' interest (prime # spread!, per annum ompensatin4 balance re>uirement for ban' credit line )xport credit insurance fee 9ption 1; ank $re'it <ine Face amount of receivable Less ban' interest expense on receivable Less compensatin4 balance re>uirement "et proceeds 6 6 6 Annuali*e' all#in#cost o% alternati3e 1 9ption 2; ank $re'it <ine = :>port $re'it nsurance Face amount of receivable Less credit insurance fee Less ban' interest expense on receivable Less compensatin4 balance re>uirement "et proceeds Values 100,000 150 .000! 1.00! .00! 20.000! 1.000! 100,000 (-,20) (20,000) 7,70 5."! 6 6 Annuali*e' all#in#cost o% option 2 "oteA The reason the compensatin4 balance is deducted from net proceeds is that 8unny oast )nterprises does not 4et that cash and does not earn interest on it- 100,000 (1,000) (2,00) (20,000) 7,00 .10! Problem 20.5 unny $oast :nterprises () 8unny oast )nterprises has been approached by a factor that offers to purchase the @on4 Kon4 Media mports receivable at a $60 per annum discount plus a 90 char4e for a non5recourse clausea- 2hat is the annualied percenta4e all5in5cost of this factorin4 option b- 2hat are the advanta4es and disadvanta4es of the factorin4 option compared to the options in 8unny oast )nterprises (&! Assumptions Face amount of receivable Maturity, days Factor discount rate, percent per annum har4e for non5recourse clauseA factor fee a. /at is te annuali*e' all#in#cost o% %actorin+4 Face amount of receivable Less cost of factorin4, discount rate Less non5recourse clause "et proceeds from factorin4 6 6 6 Annuali*e' all#in#cost o% %actorin+ &lthou4h the costs of factorin4 are clearly hi4her than usin4 ban' credit lines, factorin4 removes the receivable from the balance sheet, both as an asset and the associated debt to finance it usin4 the ban' credit line- Factorin4 also provides the cash at the start of the time period compared to aitin4 6 months later under the ban' credit line- Values 100,000 150 1.000! 2.000! 100,000 (5,000) (2,000) 0,000 22.222! Problem 20. /atcamacallit ports (A) 2hatchamacallit 8ports (2hatchamacallit! is considerin4 biddin4 to sell : $, of s'i e>uipment to .han4 Family )nterprises of 8eoul, Korea- .ayment ould be due i n six months8ince 2hatchamacallit cannot find 4ood credit information on .han4, 2hatchamacallit ants to protect its credit ris'- t is considerin4 the folloin4 financin4 solution- .han4Gs ban' issues a letter of credit on behalf of .han4, and a4rees to accept 2hatchamacallitGs draft for :$, due in six months- The acceptance fee ould cost 2hatchamacallit :<, plus reduce .han4Gs available credit line by :$,- The ban'er?s acceptance note of :$, ould be sold at a 90 per annum discount in the money mar'et- 2hat is the annualied percenta4e all5in cost to 2hatchamacallit of this ban'er?s acceptance financin4 Assumptions .rincipal of note Maturity of note, days &cceptance fee to be paid by 2hatchamacallit Discount on sale of note, per annum Letter of credit fee paid by .han4 Heduction in .han4?s available credit line All#in cost to /atcamacallit; Face amount of note Less acceptance fee Less interest "et proceeds Annuali*e' all#in cost o% %inancin+ ( total interest and fee costs / net proceeds ! x (36/maturity! 6 6 6 6 6 6 Values 100,000 150 00 2.000! 00 100,000 100,000 (00) (1,000) 5,00 -.0"! Problem 20.10 /atcamacallit ports () 2hatchamacallit could also buy export credit insurance from F& for a $-<0 premium- t finances the :$, receivable from .han4 from its credit line at 60 per annum interest- "o compensatin4 ban' balance ould be re>uireda- 2hat is 2hatchamacallitGs annualied percenta4e all5in cost of financin4 b- 2hat are .han4Gs costs c- 2hat are the advanta4es and disadvanta4es of this option compared to the ban'er?s acceptance financin4 in 2hatchamacallit (&! 2hich option ould you recommend Assumptions .rincipal of note Maturity of note, days F& export credit insurance fee nterest on credit line, per annum a. All#in#cost to /atcamacallit; Face amount Less credit insurance fee Less interest on credit line "et proceeds Annuali*e' all#in cost o% %inancin+ ( total interest and fee costs / net proceeds ! x (36/term of note! 6 6 6 Values 100,000 150 1.00! .000! Values 100,000 (1,00) (-,000) ,00 ."2"! b. /at is te cost to Pan+4 .han4 has no costs under this option, and it preserves its credit linec. /at are te a'3anta+es an' 'isa'3anta+es o% tis option4 The cost of usin4 its credit line ould cost 2hatchamacallit ;-190 compared to only 3-<0 it h the ban'er?s acceptance- @oever, .han4 ould avoid the :< cost of 4ettin4 a letter of credit, and ould avoid reducin4 its available credit line- t could be that the sale of s'i e>uipment itself could be eopardied if .han4 really needs the lost availabilty of its credit line- t mi4ht be possible for 2hatchamacallit to increase its bid t o reflect some or all of the financin4 cost difference- Mini#$ase; $ross?ell nternational an' ra*il Price @ case ases per container :>port to ra*il $osts B Pricin+ F&8 price per case, Miami (78:! Frei4ht, loadin4, N documentation FH price per case, =railian port (8antos! $alculation "150 :1$% per container 0 of FH 6 -".00 ".-2 -5.-2 0.5 -.15 2.20! 6 2.0 67. 2.0 1. 2.70 1.27 0.01 0.2 1. 0.0 1."7 6107.- 2.000! 2.00! 1.-00! 1".00 20.000! 2.000! 0.00 1.00! 0 of F 0 of frei4ht 0 of F H:$9 per container 0 of stora4e N handlin4 0 of F H:< per container 0 of F Cistributors $osts B Pricin+ 8tora4e cost ost of financin4 diaper inventory Distributor?s mar4in .rice to retailer (H:! 1."7 .5 2-.1 1-.1 1.00! 7.000! 20.000! 0 of F O months 0 of F O months 0 of .rice # stora4e # cc ra*ilian etailer $osts B Pricin+ ndustrial product tax (.T59! Tax on merc circulation services (M859! Hetailer costs and mar'up .rice per case to consumer (H:! 20.57 25.50 . 2"."5 1.000! 15.000! -0.000! 0 of price to retailer 0 of price # .T9 0 of price # .T9 # M89 a+s o% 5 per case Ciapers per case Price to $onsumer (6@'iaper) "" -2 2" 22 -2 2 12 17 60.70 60. 61.25 61.- )xport insurance F to =railian port )xchan4e rate (H:/78:! F to =railian port (H:! ra*ilian mportation $osts mport duties (D! Merchant marine renovation fee (MMHF! .ort stora4e fees .ort handlin4 fees &dditional handlin4 tax ustoms bro'era4e fees mport license Local transportation char4es Total cost to distributor (H:! CAP: P$: mall Me'ium <ar+e :>tra <ar+e 6 ate 5