Problem 20.1 Nikken Microsystems (A)

Assumptions ValuesFace amount of sale € 700,000Maturity, days 90 Trade acceptance fee, per annum 1.000%Discount rate on sale of acceptance, per annum 4.000%

All-in-Cost of Trade AcceptanceFace amount of the receivable € 700,000Less trade acceptance fee (1,750) (amount financed x acceptance fee x (days/360) )Less discount on the sale of acceptance (7,000) (amount financed x discount rate x (days/360))Net proceeds € 691,250

Annualized percentage all-in-cost (AIC) 5.063% (acceptance fee + discount) / (amount received) x (360/180)

Assume Nikken Microsystems has sold Internet servers to Telecom España for €700,000. Payment is due in 3 months and will be made with a trade acceptance from Telecom España 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?

Problem 20.2 Nikken Microsystems (B)

b. What are the U.S. dollar net proceeds received in 3 months in option 2?

d. Which option should Nikken Microsystems choose?

Assumptions ValuesFace amount of sale € 700,000Maturity, days 90

1.00 1.02

Trade acceptance fee, per annum 1.000%Discount rate on sale of acceptance, per annum 4.000%

a. What are the US dollar proceeds received at once?Face amount of the receivable € 700,000Less trade acceptance fee (1,750) (face amount x acceptance fee x (days/360) )Euro proceeds € 698,250

1.00 US dollar proceeds, now $ 698,250

b. What are the dollar proceeds received in 3 months under option 2?Face amount of the receivable € 700,000Less trade acceptance fee (1,750) (face amount x acceptance fee x (days/360) )Euro net proceeds € 698,250

1.02 US dollar net proceeds received in 3-months $ 712,215

c. Breakeven reinvestment rateUS dollars received now, part a) $ 698,250 US dollars received at end of 90 days, part b) $ 712,215 Breakeven reinvestment rate of $ now to equal $ in 3 months (per annum) 8.000%

d. Which option should Nikken Microsystems choose?If Nikken Microsystems' opportunity cost of capital is 8%, it should be indifferent financiallybetween the two options However, selling the acceptance at once, option 1, improvesNikken's liquidity and removes the debt that otherwise would be financing the acceptance fromNikken Microsystem's balance sheet.

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?

c. What is the breakeven investment rate that would equalize the net U.S. dollar proceeds from both options?

Spot exchange rate, $/€Forward exchange rate, 3-months, $/€

Spot exchange rate, $/€

3-month forward exchange rate, $/€

Problem 20.3 Motoguzzie (A)

Assumptions ValuesValue of shipment $ 3,000,000 Credit terms, days 180 Bankers' acceptance fee 1.750%Motoguzzie's WACC, per annum 10.000%

All-in-cost of Bankers' AcceptanceFace amount of bankers' acceptance $ 3,000,000.00 Less acceptance fee for 6-month maturity (26,250.00) ( face amount x acceptance fee x (term/360))Amount received by Indian $ 2,973,750.00

Opportunity cost of capital @ Motoguzzie's WACC $ 148,687.50 (amount received x WACC x 180/360)

Annualized percentage all-in-cost (AIC) 11.765% (acceptance fee +opportunity cost) / (amount received) x (360/180)

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?

Problem 20.4 Motoguzzie (B)

Assumptions ValuesValue of shipment $ 3,000,000 Credit terms, days 180 Bankers' acceptance fee 1.750%Motoguzzie's WACC, per annum 10.000%Discount rate on sale of acceptance, per annum 6.000%

All-in-Cost of Bankers' AcceptanceFace amount of bankers' acceptance $ 3,000,000.00 Less acceptance fee for 6-month maturity (26,250.00)Less discount on sale of acceptance (90,000.00)Amount received by Motoguzzie $ 2,883,750.00

Annualized percentage all-in-cost (AIC) 8.062% (acceptance fee + discount) / (amount received) x (360/180)

Assuming the facts in problem 1, Bank of America is now willing to buy Motoguzzie’s bankers’ acceptance for a discount of 6% per annum. What would be Motoguzzie’s annualized percentage all-in-cost of financing its $3,000,000 Australian receivable?

Problem 20.5 Nakatomi Toyota

a. What is the annualized percentage all-in-cost to Nakatomi Toyota?b. What are Nakatomi’s net cash proceeds, including the cash down payment?

Assumptions ValuesFace amount of sale (first payment of 5) $ 200,000 Down payment, 20% of payment $ 40,000 Period for financing, days 180 Trade acceptance fee 2.000%Discount rate on sale of acceptance, per annum 3.000%

All-in-Cost of Trade AcceptanceFace amount of sale $ 200,000.00 Less cash down-payment (40,000.00)Amount for financing $ 160,000.00 Less trade acceptance fee (amount financed x acceptance fee x (days/360) ) (1,600.00)Less discount for the period (amount financed x discount rate x (days/360)) (2,400.00)Proceeds to Nakatomi Toyota $ 156,000.00

a. Annualized percentage all-in-cost (AIC) 5.128% (acceptance fee + discount) / (amount received) x (360/180)

b. Net cash proceeds to Nakatomi ToyotaDown payment $ 40,000

Proceeds of acceptance 156,000.00 Total cash proceeds $ 196,000.00

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.

Problem 20.6 Forfaiting at Umaru Oil (Nigeria)

b. What might motivate Umaru Oil to use this relatively expensive alternative for financing?

Assumptions ValuesFace amount of the note due March 1, 2011 issued by Umaru $ 200,000 3-year LIBOR rate, per annum 6.000%Basis point spread, per annum 2.000% Total discount rate, per annum 8.000%Bank of Zurich commitment fee, per annum 2.000%Lagos City Bank endorsement fee, per annum 1.000%

What is the all-in-cost of forfaiting?Face amount of note $ 200,000 Less Lagos City bank endorsement fee (2,000)Less Bank of Zurich commitment fee for one year (4,000)Less discount on note at LIBOR plus spread (16,000)Net proceeds $ 178,000

Annualized all-in-cost of factoring 11.000% ( total interest and fee costs / face amount of note )

Umaru Oil would probably be motivated to use a forfaiter because its credit worth is toolow 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.

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?

Problem 20.7 Sunny Coast Enterprises (A)

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 ValuesFace amount of receivable $ 100,000 Maturity, days 180 Bank prime rate 5.000%Spread over prime rate on credit line 1.500% Bank interest (prime + spread), per annum 6.500%Compensating balance requirement for bank credit line 20.000%Export credit insurance fee 1.000%

Option 1: Bank Credit LineFace amount of receivable $ 100,000 Less bank interest expense on receivable (3,250)Less compensating balance requirement (20,000)Net proceeds $ 76,750

Annualized all-in-cost of alternative 1 8.469%

Option 2: Bank Credit Line + Export Credit InsuranceFace amount of receivable $ 100,000 Less credit insurance fee (1,000)Less bank interest expense on receivable (2,500)Less compensating balance requirement (20,000)Net proceeds $ 76,500

Annualized all-in-cost of option 2 9.150%

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

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 loan’s 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.

Problem 20.8 Sunny Coast Enterprises (B)

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

Assumptions ValuesFace amount of receivable $ 100,000 Maturity, days 180 Factor discount rate, percent per annum 16.000%Charge for non-recourse clause: "factor fee" 2.000%

a. What is the annualized all-in-cost of factoring?Face amount of receivable $ 100,000 Less cost of factoring, discount rate (8,000)Less non-recourse clause (2,000)Net proceeds from factoring $ 90,000

Annualized all-in-cost of factoring 22.222%

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

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.

b. What are the advantages and disadvantages of the factoring option compared to the options in Sunny Coast Enterprises (A)?

Problem 20.9 Whatchamacallit Sports (A)

Assumptions ValuesPrincipal of note $ 100,000 Maturity of note, days 180 Acceptance fee to be paid by Whatchamacallit $ 500 Discount on sale of note, per annum 2.000%Letter of credit fee paid by Phang $ 500 Reduction in Phang's available credit line $ 100,000

All-in cost to Whatchamacallit:Face amount of note $ 100,000 Less acceptance fee (500)Less interest (1,000)Net proceeds $ 98,500

Annualized all-in cost of financing 3.046% ( total interest and fee costs / net proceeds ) x (360/maturity)

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.

Phang’s bank issues a letter of credit on behalf of Phang, and agrees to accept Whatchamacallit’s draft for $100,000 due in six months. The acceptance fee would cost Whatchamacallit $500, plus reduce Phang’s 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?

Problem 20.10 Whatchamacallit Sports (B)

a. What is Whatchamacallit’s annualized percentage all-in cost of financing?b. What are Phang’s costs?

Assumptions ValuesPrincipal of note $ 100,000 Maturity of note, days 180 FCIA export credit insurance fee 1.500%Interest on credit line, per annum 6.000%

a. All-in-cost to Whatchamacallit: ValuesFace amount $ 100,000 Less credit insurance fee (1,500)Less interest on credit line (3,000)Net proceeds $ 95,500

Annualized all-in cost of financing 9.424% ( total interest and fee costs / net proceeds ) x (360/term of note)

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?

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.

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?

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 Rate CalculationCases per container 968

Export to Brazil Costs & PricingFAS price per case, Miami (US$) $ 34.00 Freight, loading, & documentation 4.32 4180 $4180 per containerCFR price per case, Brazilian port (Santos) $ 38.32

Export insurance 0.86 2.250% % of CFRCIF to Brazilian port $ 39.18

Exchange rate (R$/US$) 2.50 2.50 CIF to Brazilian port (R$) R$97.95

Brazilian Importation CostsImport duties (ID) 1.96 2.000% % of CIFMerchant marine renovation fee (MMRF) 2.70 25.00% % of freightPort storage fees 1.27 1.300% % of CIFPort handling fees 0.01 14.00 R$12 per containerAdditional handling tax 0.26 20.000% % of storage & handlingCustoms brokerage fees 1.96 2.000% % of CIFImport license 0.05 50.00 R$50 per containerLocal transportation charges 1.47 1.500% % of CIF Total cost to distributor (R$) R$107.63

Distributor's Costs & PricingStorage cost 1.47 1.500% % of CIF * monthsCost of financing diaper inventory 6.86 7.000% % of CIF * monthsDistributor's margin 23.19 20.000% % of Price + storage + cc Price to retailer (R$) 139.15

Brazilian Retailer Costs & PricingIndustrial product tax (IPT-2) 20.87 15.000% % of price to retailerTax on merc circulation services (ICMS-2) 28.80 18.000% % of price + IPT2Retailer costs and markup 56.65 30.000% % of price + IPT2 + ICMS2 Price per case to consumer (R$) 245.48

DIAPER PRICES Bags of 8 Diapers per Price to Consumer per case case (R$/diaper)

Small 44 352 R$0.70 Medium 32 256 R$0.96 Large 24 192 R$1.28 Extra Large 22 176 R$1.39