chapter 16 Q5
Whatchamacallit Sports (B). Whatchamacallit Sports (Whatchamacallit) is considering bidding to sell $102,000 of ski equipment to Phang Family Enterprises of Seoul, Korea. Payment would be due in seven months. Since Whatchamacallit cannot find good credit information on Phang, Whatchamacallit wants to protect its credit risk. It is considering the following financing solutions. Alternative 1: Phang's bank issues a letter of credit on behalf of Phang and agrees to accept Whatchamacallit's draft for $102,000 due in seven months. The acceptance fee would cost Whatchamacallit $550, plus reduce Phang's available credit line by $102,000. The bankers' acceptance note of $102,000 would be sold at a 2.1% per annum discount in the money market. Alternative 2: Whatchamacallit could also buy export credit insurance from FCIA for a 1.5% premium. It finances the $102,000 receivable from Phang from its credit line at 6.4% per annum interest. No compensating bank balance would be required. a. What is Whatchamacallit's annualized percentage all-in cost of each alternative? b. What are Phang's costs for alternative 2? c. What are the advantages and disadvantages of alternative 2 compared to the bankers' acceptance financing in alternative 1? Which alternative would you recommend? (NOTE: Assume a 360-day year.) a. What is Whatchamacallit's annualized percentage all-in cost of each alternative? Alternative 1: bankers' acceptance financing. The discount on the sale of acceptance is $. (Round to the nearest cent.) Calculate the net proceeds below: (Round to the nearest cent.) Alternative 1 Face amount of note Less acceptance fee Less discount on sale of acceptance Not proceeds The annualized percentage all-in cost (AIC) is%. (Round to three decimal places.) Alternative 2: export credit insurance. The interest expense on the credit line is $. (Round to the nearest cent.) Calculate the net proceeds below: (Round to the nearest cent.) Alternative 2 Face amount of note Less credit insurance fee Less interest on credit line Net proceeds The annualized percentage all-in cost (AIC) is %. (Round to three decimal places.) b. What are Phang's costs for alternative 2? (Select the best choice below.) OA. Phang's costs for alternative 2 is equal to the costs for alternative 1. B. Phang's costs for alternative 2 is equal to the credit insurance fee. C. Phang's costs for alternative 2 is equal to the interest on the credit line. D. Phang has no costs under this alternative, and it preserves its credit line. c. What are the advantages and disadvantages of alternative 2 compared to the bankers' acceptance financing in alternative 1? (Select all the choices that apply.) A. The annualized percentage all-in cost of using its credit line would cost Whatchamacallit much more than with the bankers' acceptance. B. The annualized percentage all-in cost of using its credit line would cost Whatchamacallit much less than with the bankers' acceptance. c. With alternative 2, Phang would avoid the $500 cost of getting a letter of credit and reducing its available credit line. It could be that the sale of ski equipment itself could be jeopardized if Phang really needs to retain the availability of its credit line. D. It might be possible for Whatchamacallit to increase its bid to reflect some or all of the financing cost difference. Which alternative would you recommend? (Select from the drop-down menu.) Whatchamacallit Sports (B). Whatchamacallit Sports (Whatchamacallit) is considering bidding to sell $102,000 of ski equipment to Phang Family Enterprises of Seoul, Korea. Payment would be due in seven months. Since Whatchamacallit cannot find good credit information on Phang, Whatchamacallit wants to protect its credit risk. It is considering the following financing solutions. Alternative 1: Phang's bank issues a letter of credit on behalf of Phang and agrees to accept Whatchamacallit's draft for $102,000 due in seven months. The acceptance fee would cost Whatchamacallit $550, plus reduce Phang's available credit line by $102,000. The bankers' acceptance note of $102,000 would be sold at a 2.1% per annum discount in the money market. Alternative 2: Whatchamacallit could also buy export credit insurance from FCIA for a 1.5% premium. It finances the $102,000 receivable from Phang from its credit line at 6.4% per annum interest. No compensating bank balance would be required. a. What is Whatchamacallit's annualized percentage all-in cost of each alternative? b. What are Phang's costs for alternative 2? c. What are the advantages and disadvantages of alternative 2 compared to the bankers' acceptance financing in alternative 1? Which alternative would you recommend? (NOTE: Assume a 360-day year.) a. What is Whatchamacallit's annualized percentage all-in cost of each alternative? Alternative 1: bankers' acceptance financing. The discount on the sale of acceptance is $. (Round to the nearest cent.) Calculate the net proceeds below: (Round to the nearest cent.) Alternative 1 Face amount of note Less acceptance fee Less discount on sale of acceptance Not proceeds The annualized percentage all-in cost (AIC) is%. (Round to three decimal places.) Alternative 2: export credit insurance. The interest expense on the credit line is $. (Round to the nearest cent.) Calculate the net proceeds below: (Round to the nearest cent.) Alternative 2 Face amount of note Less credit insurance fee Less interest on credit line Net proceeds The annualized percentage all-in cost (AIC) is %. (Round to three decimal places.) b. What are Phang's costs for alternative 2? (Select the best choice below.) OA. Phang's costs for alternative 2 is equal to the costs for alternative 1. B. Phang's costs for alternative 2 is equal to the credit insurance fee. C. Phang's costs for alternative 2 is equal to the interest on the credit line. D. Phang has no costs under this alternative, and it preserves its credit line. c. What are the advantages and disadvantages of alternative 2 compared to the bankers' acceptance financing in alternative 1? (Select all the choices that apply.) A. The annualized percentage all-in cost of using its credit line would cost Whatchamacallit much more than with the bankers' acceptance. B. The annualized percentage all-in cost of using its credit line would cost Whatchamacallit much less than with the bankers' acceptance. c. With alternative 2, Phang would avoid the $500 cost of getting a letter of credit and reducing its available credit line. It could be that the sale of ski equipment itself could be jeopardized if Phang really needs to retain the availability of its credit line. D. It might be possible for Whatchamacallit to increase its bid to reflect some or all of the financing cost difference. Which alternative would you recommend? (Select from the drop-down menu.)
