Problem 20.

1 Nikken Microsystems (A)

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?

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

All-in-Cost of Trade Acceptance

Face amount of the receivable € 700,000
Less 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)
Assumptions Values
Face amount of sale € 712,000
Maturity, days 120
Spot exchange rate, $/€ 1.03
Forward exchange rate, 4-months, $/€ 1.05
Trade acceptance fee, per annum 1.400%
Discount rate on sale of acceptance, per annum 4.300%

a. What are the US dollar proceeds received at once?

Face amount of the receivable € 712,000
Less trade acceptance fee (3,323)
(face amount x acceptance fee x (days/360) )
Euro proceeds € 708,677
Spot exchange rate, $/€ 1.03
US dollar proceeds, now $ 729,938

b. What are the dollar proceeds received in 3 months under option 2?

Face amount of the receivable € 712,000
Less trade acceptance fee (3,323)
(face amount x acceptance fee x (days/360) )
Euro net proceeds € 708,677
3-month forward exchange rate, $/€ 1.05
US dollar net proceeds received in 4-months $ 744,111

c. Breakeven reinvestment rate

US dollars received now, part a) $ 729,938
US dollars received at end of 120 days, part b) $ 744,111
Breakeven reinvestment rate of $ now to equal $ in 5.825%

d. Which option should Nikken Microsystems choose?

If Nikken Microsystems' opportunity cost of capital is 5.825%, it should be indifferent financially
between the two options However, selling the acceptance at once, option 2, improves
Nikken's liquidity and removes the debt that otherwise would be financing the acceptance from
Nikken Microsystem's balance sheet.
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 Values
Value 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' Acceptance

Face 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)
Problem 20.4 Motoguzzie (B)

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?

Assumptions Values
Value 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' Acceptance

Face 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)
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 Nakatomi’s net cash proceeds, including the cash down payment?

Assumptions Values
Face 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 Acceptance

Face 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 Toyota

Down payment $ 40,000
Proceeds of acceptance 156,000.00
Total cash proceeds $ 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 Values
Face 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 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.
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 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.

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 Values
Face 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 Line

Face 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 Insurance

Face 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 that
Sunny Coast Enterprises does not get that cash and does not earn interest on it.
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 Values
Face 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, 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.
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.

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?

Assumptions Values
Principal 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)
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 Whatchamacallit’s annualized percentage all-in cost of financing?

b. What are Phang’s 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 Values
Principal 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: Values

Face 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?

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 Calculation

Cases per container 968

Export to Brazil Costs & Pricing

FAS price per case, Miami (US$) $ 34.00
Freight, loading, & documentation 4.32 4180 $4180 per container
CFR price per case, Brazilian port (Santos) $ 38.32

Export insurance 0.86 2.250% % of CFR

CIF to Brazilian port $ 39.18

Exchange rate (R$/US$) 2.50 2.50

CIF to Brazilian port (R$) R$97.95

Brazilian Importation Costs

Import duties (ID) 1.96 2.000% % of CIF
Merchant marine renovation fee (MMRF) 2.70 25.00% % of freight
Port storage fees 1.27 1.300% % of CIF
Port handling fees 0.01 14.00 R$12 per container
Additional handling tax 0.26 20.000% % of storage & handling
Customs brokerage fees 1.96 2.000% % of CIF
Import license 0.05 50.00 R$50 per container
Local transportation charges 1.47 1.500% % of CIF
Total cost to distributor (R$) R$107.63

Distributor's Costs & Pricing

Storage cost 1.47 1.500% % of CIF * months
Cost of financing diaper inventory 6.86 7.000% % of CIF * months
Distributor's margin 23.19 20.000% % of Price + storage + cc
Price to retailer (R$) 139.15

Brazilian Retailer Costs & Pricing

Industrial product tax (IPT-2) 20.87 15.000% % of price to retailer
Tax on merc circulation services (ICMS-2) 28.80 18.000% % of price + IPT2
Retailer 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