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 $-0 per annum of the face amount of the note- This acceptance ill be sold at a
10 per annum discount- 2hat is the annualied percenta4e all5in5cost in euros of thi s method of
trade financin4
Assumptions
Face amount of sale
Maturity, days
Trade acceptance fee, per annum
Discount rate on sale of acceptance, per annum
All#in#$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
(1,70)
(7,000)
€ 1,20
.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 to 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
forard for dollars at the 35month forard 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>ualie 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, :/+
Forard exchan4e rate, 35months, :/ +
Trade acceptance fee, per annum
Discount rate on sale of acceptance, per annum
a. /at are te  '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 te 'ollar procee's recei3e' in - monts 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 forard 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
(1,70)
6
€ 5,20
1.00
5,20
€ 700,000
(1,70)
6
€ 5,20
1.02
712,21
:
:
'. /ic option soul' Nikken Microsystems coose4
f "i''en Microsystems? opportunity cost of capital is %0, it should be indifferent financially
beteen the to options @oever, sellin4 the acceptance at once, option $, improves
"i''en?s li>uidity and removes the debt that otherise ould be financin4 the acceptance from
"i''en Microsystem?s balance sheet-
6;%,9<
$9,9$<
5.000!
Problem 20.- Moto+u**ie (A)
Moto4uie 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 Moto4uie, 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- Moto4uie has a
ei4hted avera4e cost of capital of $0- f Moto4uie holds this acceptance to maturity, hat is
its annualied percenta4e all5in5cost
Assumptions
Calue of shipment
redit terms, days
=an'ers? acceptance fee
Moto4uie?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  Moto4uie?s 2&
(amount received x 2& x $%/36!
&nnualied percenta4e all5in5cost (&!
(acceptance fee #opportunity cost! / (amount received! x (36/$%!
6
Values
-,000,000
150
1.70!
10.000!
6
-,000,000.00
(2,20.00)
6
2,7-,70.00
6
1"5,57.0
11.7!
Problem 20." Moto+u**ie ()
&ssumin4 the facts in problem $, =an' of &merica is no illin4 to buy Moto4uieGs ban'ersG
acceptance for a discount of 60 per annum- 2hat ould be Moto4uieGs annualied percenta4e
all5in5cost of financin4 its :3,, &ustralian receivable
Assumptions
Calue of shipment
redit terms, days
=an'ers? acceptance fee
Moto4uie?s 2&, per annum
Discount rate on sale of acceptance, per annum
All#in#$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 Moto4uie
&nnualied percenta4e all5in5cost (&!
(acceptance fee # discount! / (amount received! x (36/$%!
6
6
6
Values
-,000,000
150
1.70!
10.000!
.000!
-,000,000.00
(2,20.00)
(0,000.00)
2,55-,70.00
5.02!
Problem 20. Nakatomi &oyota
"a'atomi Toyota buys its cars from Toyota Motors578&, and sells them to 7-8- customers- Ene of
its customers is )co@ire, a car rental firm hich buys cars from "a'atomi Toyota at a holesale
price- Final payment is due to "a'atomi Toyota in 6 months- )co@ire has bou4ht :9, orth
of cars from "a'atomi, ith a cash don payment of :1, and the balance due in 6 months
ithout any interest char4ed as a sales incentive- "a'atomi Toyota ill have the )co@ire receivable
accepted by &lliance &cceptance for a 90 fee, and then sell it at a 30 per annum discount to 2ells
Far4o =an'-
a- 2hat is the annualied percenta4e all5in5cost to "a'atomi Toyota
b- 2hat are "a'atomiGs net cash proceeds, includin4 the cash don payment
Assumptions
Face amount of sale (first payment of <!
Don payment, 90 of payment
.eriod for financin4, days
Trade acceptance fee
Discount rate on sale of acceptance, per annum
6
6
All#in#$ost o% &ra'e Acceptance
Face amount of sale
Less cash don5payment
&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)
10,000.00
(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
Don 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 8iss 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 annualied 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 te 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
folloin4 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 90 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 annualied 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
(-,20)
(20,000)
7,70
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
.10!
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 annualied 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 te 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. /atcamacallit ports (A)
2hatchamacallit 8ports (2hatchamacallit! is considerin4 biddin4 to sell : $, of s'i
e>uipment to .han4 Family )nterprises of 8eoul, Korea- .ayment ould be due i n six months8ince 2hatchamacallit cannot find 4ood credit information on .han4, 2hatchamacallit ants to
protect its credit ris'- t is considerin4 the folloin4 financin4 solution-
.han4Gs ban' issues a letter of credit on behalf of .han4, and a4rees to accept 2hatchamacallitGs
draft for :$, 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 annualied 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 /atcamacallit;
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 /atcamacallit 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 annualied 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 /atcamacallit;
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 te cost to Pan+4
.han4 has no costs under this option, and it preserves its credit linec. /at are te a'3anta+es an' 'isa'3anta+es o% tis option4
The cost of usin4 its credit line ould cost 2hatchamacallit ;-190 compared to only 3-<0 it h the
ban'er?s acceptance- @oever, .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
eopardied 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, =railian port (8antos!
$alculation
"150
:1$% per container
0 of FH
6
-".00
".-2
-5.-2
0.5
-.15
2.20!
6
2.0
67.
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
Cistributors $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
12
17
60.70
60.
61.25
61.-
)xport insurance
F to =railian port
)xchan4e rate (H:/78:!
F to =railian port (H:!
ra*ilian mportation $osts
mport duties (D!
Merchant marine renovation fee (MMHF!
.ort stora4e fees
.ort handlin4 fees
&dditional handlin4 tax
ustoms bro'era4e fees
mport license
Local transportation char4es
Total cost to distributor (H:!
CAP: P$:
mall
Me'ium
<ar+e
:>tra <ar+e
6
ate
5