2. Fagor Automaton (FA) has received an order for phone switches from Singapore. The switches will be
Question:
2. Fagor Automaton (FA) has received an order for phone switches from Singapore. The switches will be exported under the terms of a documentary credit issued by Sumitomo Bank on behalf of Singapore Telecommunications.
Under the terms of the D/C, the face value of the export order, €12 million, will be paid six months after Sumitomo accepts a draft drawn by Fagor. The current discount rate on six-month acceptances is 8.5% per year, and the acceptance fee is 1.25% per year. In addition, there is a flat commission, equal to 0.5% of the face amount of the accepted draft that must be paid if it is sold.
(a) How much cash will Fagor receive if it holds the acceptance until maturity?
(b) How much cash will it receive if it sells the acceptance at once?
(c) Suppose Fagor’s opportunity cost of funds is 8.75% per year. If it wishes to maximize the present value of its acceptance, should it discount the acceptance?
Step by Step Answer:
International Financial Management
ISBN: 9781118929322
10th Edition
Authors: Alan C. Shapiro, Peter Moles