3. Seattle Scientific, Inc. Josh Miller is chief financial officer of a medium-sized Seattle-based medical device manufacturer. The company's annual sales of $40 million have been growing rapidly, and working capital financing is a common source of concern. He has recently been approached by one of his major Japanese customers, Yokasa, with a new payment proposal. Yokasa typically orders 12,500,000 in product every other month and pays in Japanese yen. The current payment terms extended by Seattle are 30 days, with no discounts given for early or cash payment. Yokasa has suggested that it would be will- ing to pay in cash-in Japanese yen-if it were given a 4.5% discount on the purchase price. Josh Miller gathered the following quotes from his bank on cur- rent spot and forward exchange rates, and estimated Yokasa's cost of capital.

a. What is Seattle Scientific's "cost of hedging" the yen receivable?

b. How much in U.S. dollars will Seattle Scientific receive 1) with the discount, and 2) with no dis- count but fully covered with a forward contract?

c. If Josh were to compare the results of part b in present value terms, which appears to be prefer- able?

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Spot rate: 111.40/$ Yokasa's WACC: 8.850% 30-day Seattle forward rate: 111.00/S Scientific's WACC 9.200% 90-day forward rate: 110.40/$ 180-day forward rates 109.20/5