8. Forfaiting at Kaduna Oil (Nigeria). Kaduna Oil of Nigeria has purchased $1,000,000 of oil drilling equipment from Unicorn Drilling of Houston, Texas. Kaduna 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 five notes of $200,000 each at a discount. The discount rate would be approximately 8% per annum based on the expected three-year LIBOR rate plus 200 basis points, paid by Kaduna Oil. Bank of Zurich also would charge Kaduna Oil an addi- tional 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 Kaduna Oil will be endorsed by their bank, Lagos City Bank, for a 1% fee and delivered to Unicorn Drilling. At this point Unicorn Drilling will endorse the notes without recourse and discount them with the for- faiter, 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 interna- tional 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 Kaduna Oil of financing the first $200,000 note due March 1, 2004?

b. What might motivate Kaduna Oil to use this rel- atively expensive alternative for financing?