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Problem 20.

1 Nikken Microsystems (A)


Assume Nikken Microsystems has sold Internet servers to Telecom Espaa for 700,000. Payment
is due in 3 months and will be made with a trade acceptance from Telecom Espaa Acceptance. The
acceptance fee is 1.0% per annum of the face amount of the note. This acceptance will be sold at a
4% per annum discount. What is the annualized percentage all-in-cost in euros of this method of
trade financing?
Assumptions
Face amount of sale
Maturity, days
Trade acceptance fee, per annum
Discount rate on sale of acceptance, per annum
All-in-Cost of Trade Acceptance
Face amount of the receivable
Less trade acceptance fee
(amount financed x acceptance fee x (days/360) )
Less discount on the sale of acceptance
(amount financed x discount rate x (days/360))
Net proceeds

Annualized percentage all-in-cost (AIC)


(acceptance fee + discount) / (amount received) x (360/180)

Values
700,000
90
1.000%
4.000%

700,000
(1,750)
(7,000)
691,250

5.063%

Problem 20.2 Nikken Microsystems (B)


Assume that Nikken Microsystems prefers to receive U.S. dollars rather than euros for the trade
transaction described in problem 2. It is considering two alternatives: 1) It can sell the acceptance for
euros at once and convert the euros immediately to U.S. dollars at the spot rate of exchange of $1.00/;
or 2) It can hold the euro acceptance until maturity but at the start sell the expected euro proceeds
forward for dollars at the 3-month forward rate of $1.02/.
a. What are the U.S. dollar net proceeds received at once from the discounted trade acceptance in option
1?
b. What are the U.S. dollar net proceeds received in 3 months in option 2?
c. What is the breakeven investment rate that would equalize the net U.S. dollar proceeds from both
options?
d. Which option should Nikken Microsystems choose?
Assumptions
Face amount of sale
Maturity, days
Spot exchange rate, $/
Forward exchange rate, 3-months, $/
Trade acceptance fee, per annum
Discount rate on sale of acceptance, per annum
a. What are the US dollar proceeds received at once?
Face amount of the receivable
Less trade acceptance fee
(face amount x acceptance fee x (days/360) )
Euro proceeds
Spot exchange rate, $/
US dollar proceeds, now
b. What are the dollar proceeds received in 3 months under option 2?
Face amount of the receivable
Less trade acceptance fee
(face amount x acceptance fee x (days/360) )
Euro net proceeds
3-month forward exchange rate, $/
US dollar net proceeds received in 3-months
c. Breakeven reinvestment rate
US dollars received now, part a)
US dollars received at end of 90 days, part b)
Breakeven reinvestment rate of $ now to equal $ in 3 months (per annum)

Values
700,000
90
1.00
1.02
1.000%
4.000%

700,000
(1,750)

698,250
1.00
698,250

700,000
(1,750)

698,250
1.02
712,215

$
$

d. Which option should Nikken Microsystems choose?


If Nikken Microsystems' opportunity cost of capital is 8%, it should be indifferent financially
between the two options However, selling the acceptance at once, option 1, improves
Nikken's liquidity and removes the debt that otherwise would be financing the acceptance from
Nikken Microsystem's balance sheet.

698,250
712,215
8.000%

Problem 20.3 Motoguzzie (A)

Motoguzzie exports large-engine motorcycles (greater than 700cc) to Australia and invoices its
customers in U.S. dollars. Sydney Wholesale Imports has purchased $3,000,000 of merchandise
from Motoguzzie, with payment due in six months. The payment will be made with a bankers
acceptance issued by Charter Bank of Sydney at a fee of 1.75% per annum. Motoguzzie has a
weighted average cost of capital of 10%. If Motoguzzie holds this acceptance to maturity, what is
its annualized percentage all-in-cost?
Assumptions
Value of shipment
Credit terms, days
Bankers' acceptance fee
Motoguzzie's WACC, per annum
All-in-cost of Bankers' Acceptance
Face amount of bankers' acceptance
Less acceptance fee for 6-month maturity
( face amount x acceptance fee x (term/360))
Amount received by Indian
Opportunity cost of capital @ Motoguzzie's WACC
(amount received x WACC x 180/360)
Annualized percentage all-in-cost (AIC)
(acceptance fee +opportunity cost) / (amount received) x (360/180)

Values
3,000,000
180
1.750%
10.000%

3,000,000.00
(26,250.00)

2,973,750.00

148,687.50

11.765%

Problem 20.4 Motoguzzie (B)


Assuming the facts in problem 1, Bank of America is now willing to buy Motoguzzies bankers
acceptance for a discount of 6% per annum. What would be Motoguzzies annualized percentage
all-in-cost of financing its $3,000,000 Australian receivable?
Assumptions
Value of shipment
Credit terms, days
Bankers' acceptance fee
Motoguzzie's WACC, per annum
Discount rate on sale of acceptance, per annum
All-in-Cost of Bankers' Acceptance
Face amount of bankers' acceptance
Less acceptance fee for 6-month maturity
Less discount on sale of acceptance
Amount received by Motoguzzie
Annualized percentage all-in-cost (AIC)
(acceptance fee + discount) / (amount received) x (360/180)

Values
3,000,000
180
1.750%
10.000%
6.000%

3,000,000.00
(26,250.00)
(90,000.00)
2,883,750.00
8.062%

Problem 20.5 Nakatomi Toyota


Nakatomi Toyota buys its cars from Toyota Motors-USA, and sells them to U.S. customers. One of
its customers is EcoHire, a car rental firm which buys cars from Nakatomi Toyota at a wholesale
price. Final payment is due to Nakatomi Toyota in 6 months. EcoHire has bought $200,000 worth
of cars from Nakatomi, with a cash down payment of $40,000 and the balance due in 6 months
without any interest charged as a sales incentive. Nakatomi Toyota will have the EcoHire receivable
accepted by Alliance Acceptance for a 2% fee, and then sell it at a 3% per annum discount to Wells
Fargo Bank.

a. What is the annualized percentage all-in-cost to Nakatomi Toyota?


b. What are Nakatomis net cash proceeds, including the cash down payment?
Assumptions
Face amount of sale (first payment of 5)
Down payment, 20% of payment
Period for financing, days
Trade acceptance fee
Discount rate on sale of acceptance, per annum

$
$

All-in-Cost of Trade Acceptance


Face amount of sale
Less cash down-payment
Amount for financing
Less trade acceptance fee
(amount financed x acceptance fee x (days/360) )
Less discount for the period
(amount financed x discount rate x (days/360))
Proceeds to Nakatomi Toyota

$
$

Values
200,000
40,000
180
2.000%
3.000%

200,000.00
(40,000.00)
160,000.00
(1,600.00)

a. Annualized percentage all-in-cost (AIC)


(acceptance fee + discount) / (amount received) x (360/180)

(2,400.00)
156,000.00

5.128%

b. Net cash proceeds to Nakatomi Toyota


Down payment
Proceeds of acceptance
Total cash proceeds

$
$

40,000
156,000.00
196,000.00

Problem 20.6 Forfaiting at Umaru Oil (Nigeria)


Umaru Oil of Nigeria has purchased $1,000,000 of oil drilling equipment from Gunslinger Drilling
of Houston, Texas. Umaru Oil must pay for this purchase over the next five years at a rate of
$200,000 per year due on March 1 of each year.

Bank of Zurich, a Swiss forfaiter, has agreed to buy the 5 notes of $200,000 each at a discount.
The discount rate would be approximately 8% per annum based on the expected 3-year LIBOR rate
plus 200 basis points, paid by Umaru Oil. Bank of Zurich also would charge Umaru Oil an
additional commitment fee of 2% per annum from the date of its commitment to finance until
receipt of the actual discounted notes issued in accordance with the financing contract. The
$200,000 promissory notes will come due on March 1 in successive years.

The promissory notes issued by Umaru Oil will be endorsed by their bank, Lagos City Bank, for
a 1% fee and delivered to Gunslinger Drilling. At this point Gunslinger Drilling will endorse the
notes without recourse and discount them with the forfaiter, Bank of Zurich, receiving the full
$200,000 principal amount. Bank of Zurich will sell the notes by re-discounting them to investors
in the international money market without recourse. At maturity the investors holding the notes will
present them for collection at Lagos City Bank. If Lagos City Bank defaults on payment, the
investors will collect on the notes from Bank of Zurich.
a. What is the annualized percentage all-in-cost to Umaru Oil of financing the first $200,000 note
due March 1, 2011?
b. What might motivate Umaru Oil to use this relatively expensive alternative for financing?
Assumptions
Face amount of the note due March 1, 2011 issued by Umaru
3-year LIBOR rate, per annum
Basis point spread, per annum
Total discount rate, per annum
Bank of Zurich commitment fee, per annum
Lagos City Bank endorsement fee, per annum

What is the all-in-cost of forfaiting?


Face amount of note
Less Lagos City bank endorsement fee
Less Bank of Zurich commitment fee for one year
Less discount on note at LIBOR plus spread
Net proceeds

Annualized all-in-cost of factoring


( total interest and fee costs / face amount of note )
Umaru Oil would probably be motivated to use a forfaiter because its credit worth is too
low to qualify for more normal financing. Note that the 11% annual costs are paid by
Umaru Oil itself -- the importer, rather than by Gunslinger Drilling, the exporter.

Values
200,000
6.000%
2.000%
8.000%
2.000%
1.000%

200,000
(2,000)
(4,000)
(16,000)
178,000
11.000%

Problem 20.7 Sunny Coast Enterprises (A)


Sunny Coast Enterprises has sold a combination of films and DVDs to Hong Kong Media
Incorporated for US$100,000, with payment due in six months. Sunny Coast Enterprises has the
following alternatives for financing this receivable: 1) Use its bank credit line. Interest would be at
the prime rate of 5% plus 150 basis points per annum. Sunny Coast Enterprises would need to
maintain a compensating balance of 20% of the loans face amount. No interest will be paid on the
compensating balance by the bank; or 2) Use its bank credit line but purchase export credit
insurance for a 1% fee. Because of the reduced risk, the bank interest rate would be reduced to 5%
per annum without any points.

a. What are the annualized percentage all-in-costs of each option?


b. What are the advantages and disadvantages of each option?
c. Which option would you recommend?
Assumptions
Face amount of receivable
Maturity, days
Bank prime rate
Spread over prime rate on credit line
Bank interest (prime + spread), per annum
Compensating balance requirement for bank credit line
Export credit insurance fee
Option 1: Bank Credit Line
Face amount of receivable
Less bank interest expense on receivable
Less compensating balance requirement
Net proceeds

Annualized all-in-cost of alternative 1

Option 2: Bank Credit Line + Export Credit Insurance


Face amount of receivable
Less credit insurance fee
Less bank interest expense on receivable
Less compensating balance requirement
Net proceeds

Values
100,000
180
5.000%
1.500%
6.500%
20.000%
1.000%

100,000
(3,250)
(20,000)
76,750
8.469%

Annualized all-in-cost of option 2


Note: The reason the compensating balance is deducted from net proceeds is that
Sunny Coast Enterprises does not get that cash and does not earn interest on it.

100,000
(1,000)
(2,500)
(20,000)
76,500
9.150%

Problem 20.8 Sunny Coast Enterprises (B)


Sunny Coast Enterprises has been approached by a factor that offers to purchase the Hong Kong
Media Imports receivable at a 16% per annum discount plus a 2% charge for a non-recourse clause.
a. What is the annualized percentage all-in-cost of this factoring option?
b. What are the advantages and disadvantages of the factoring option compared to the options in
Sunny Coast Enterprises (A)?
Assumptions
Face amount of receivable
Maturity, days
Factor discount rate, percent per annum
Charge for non-recourse clause: "factor fee"

a. What is the annualized all-in-cost of factoring?


Face amount of receivable
Less cost of factoring, discount rate
Less non-recourse clause
Net proceeds from factoring

Annualized all-in-cost of factoring


Although the costs of factoring are clearly higher than using bank credit lines, factoring
removes the receivable from the balance sheet, both as an asset and the associated debt
to finance it using the bank credit line. Factoring also provides the cash at the start of
the time period compared to waiting 6 months later under the bank credit line.

Values
100,000
180
16.000%
2.000%

100,000
(8,000)
(2,000)
90,000
22.222%

Problem 20.9 Whatchamacallit Sports (A)


Whatchamacallit Sports (Whatchamacallit) is considering bidding to sell $100,000 of ski
equipment to Phang Family Enterprises of Seoul, Korea. Payment would be due in six months.
Since Whatchamacallit cannot find good credit information on Phang, Whatchamacallit wants to
protect its credit risk. It is considering the following financing solution.

Phangs bank issues a letter of credit on behalf of Phang, and agrees to accept Whatchamacallits
draft for $100,000 due in six months. The acceptance fee would cost Whatchamacallit $500, plus
reduce Phangs available credit line by $100,000. The banker's acceptance note of $100,000 would
be sold at a 2% per annum discount in the money market. What is the annualized percentage all-in
cost to Whatchamacallit of this banker's acceptance financing?

Assumptions
Principal of note
Maturity of note, days
Acceptance fee to be paid by Whatchamacallit
Discount on sale of note, per annum
Letter of credit fee paid by Phang
Reduction in Phang's available credit line
All-in cost to Whatchamacallit:
Face amount of note
Less acceptance fee
Less interest
Net proceeds
Annualized all-in cost of financing
( total interest and fee costs / net proceeds ) x (360/maturity)

$
$
$
$

Values
100,000
180
500
2.000%
500
100,000

100,000
(500)
(1,000)
98,500
3.046%

Problem 20.10 Whatchamacallit Sports (B)


Whatchamacallit could also buy export credit insurance from FCIA for a 1.5% premium. It finances the
$100,000 receivable from Phang from its credit line at 6% per annum interest. No compensating bank
balance would be required.
a. What is Whatchamacallits annualized percentage all-in cost of financing?
b. What are Phangs costs?
c. What are the advantages and disadvantages of this option compared to the banker's acceptance
financing in Whatchamacallit (A)? Which option would you recommend?
Assumptions
Principal of note
Maturity of note, days
FCIA export credit insurance fee
Interest on credit line, per annum

a. All-in-cost to Whatchamacallit:
Face amount
Less credit insurance fee
Less interest on credit line
Net proceeds
Annualized all-in cost of financing
( total interest and fee costs / net proceeds ) x (360/term of note)

Values
100,000
180
1.500%
6.000%

Values
100,000
(1,500)
(3,000)
95,500
9.424%

b. What is the cost to Phang?


Phang has no costs under this option, and it preserves its credit line.
c. What are the advantages and disadvantages of this option?
The cost of using its credit line would cost Whatchamacallit 9.42% compared to only 3.05% with the
banker's acceptance. However, Phang would avoid the $500 cost of getting a letter of credit, and would
avoid reducing its available credit line. It could be that the sale of ski equipment itself could be
jeopardized if Phang really needs the lost availabilty of its credit line. It might be possible for
Whatchamacallit to increase its bid to reflect some or all of the financing cost difference.

Mini-Case: Crosswell International and Brazil


Price / case
Cases per container
Export to Brazil Costs & Pricing
FAS price per case, Miami (US$)
Freight, loading, & documentation
CFR price per case, Brazilian port (Santos)

Calculation

4180

$4180 per container

% of CFR

34.00
4.32
38.32
0.86
39.18

2.250%

2.50
R$97.95

2.50

1.96
2.70
1.27
0.01
0.26
1.96
0.05
1.47
R$107.63

2.000%
25.00%
1.300%
14.00
20.000%
2.000%
50.00
1.500%

% of CIF
% of freight
% of CIF
R$12 per container
% of storage & handling
% of CIF
R$50 per container
% of CIF

Distributor's Costs & Pricing


Storage cost
Cost of financing diaper inventory
Distributor's margin
Price to retailer (R$)

1.47
6.86
23.19
139.15

1.500%
7.000%
20.000%

% of CIF * months
% of CIF * months
% of Price + storage + cc

Brazilian Retailer Costs & Pricing


Industrial product tax (IPT-2)
Tax on merc circulation services (ICMS-2)
Retailer costs and markup
Price per case to consumer (R$)

20.87
28.80
56.65
245.48

15.000%
18.000%
30.000%

% of price to retailer
% of price + IPT2
% of price + IPT2 + ICMS2

Bags of 8
per case

Diapers per
case

Price to Consumer
(R$/diaper)

44
32
24
22

352
256
192
176

R$0.70
R$0.96
R$1.28
R$1.39

Export insurance
CIF to Brazilian port
Exchange rate (R$/US$)
CIF to Brazilian port (R$)
Brazilian Importation Costs
Import duties (ID)
Merchant marine renovation fee (MMRF)
Port storage fees
Port handling fees
Additional handling tax
Customs brokerage fees
Import license
Local transportation charges
Total cost to distributor (R$)

DIAPER PRICES

Small
Medium
Large
Extra Large

Rate
968