MidTech is a multinational U.S.A. company that performs diverse activities. It manufactures electronic tools like hand-held digital electronic veniers, digital multimeters, voltage testers etc.

To conduct this manufacturing they import certain electronic components from countries like Japan and South Korea.

The market for the manufactured tools are the U.S.A, Australia, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K. Therefore, the company has already put up a subsidiary in the U.K. It resells and distributes the products to different businesses. The quarterly net profit after tax generated by the subsidiary is 500,000. The exports to Canada and Australia are to other independent distributing companies that buy the tools at wholesale prices from MidTech.

The company is currently also considering the manufacturing of other hand-held tools like electric drills, circular saws, electric grinders and electric cutters. Market research shows that the main market for those products will be the African continent. Based on this research, MidTech sent you to South Africa to investigate and research the establishment of a manufacturing plant there. The reason for this is that MidTech expects that the manufacturing costs will be much less in South Africa, due to lower labour costs and also lower overhead expenses, than in the U.S.A. Whilst you were conducting the research, you also had discussions with government officials and central bank representatives in South Africa. It became evident that South Africa will be extremely satisfied if the electric tools could be manufactured there, since it will have a positive impact on the Gross Domestic Product of the country when the products can be exported to other African countries. After these discussions, you were also approached by the chief executive of Electo Co. which is an existing electronic component manufacturer in South Africa. According to him, he is willing to enter into an alternative agreement with MidTech. He mentions that Electo Co. also wants to manufacture the electric tools, but in order to prevent competition between Electo Co and MidTech, he believes they can enter into an agreement that could benefit both entities. He came up with the following proposal:

• MidTech provides Electo with the capital to put up the production plant for the electric tool manufacturing plant. The reason is they do not have to put up a complete new plant. The existing electronic component plant can be expanded to facilitate the manufacturing of the tools. Furthermore, the existing infrastructure of Electo Co. in terms of markets in other African countries, trained production staff etc. already exist. Thus, less capital will be required. If it is a new production plant, it will cost ZAR150,000,000. If it is an expansion of the existing plant, it will cost ZAR120,000,000.
• In return, MidTech can benefit from obtaining a 30% shareholding in both the electronic component manufacturing and the electronic tool manufacturing divisions of Electo Co. This will provide MidTech a multinational investment with an estimated net profit after tax of ZAR2, 000,000 per month and also provide MidTech with the opportunity to replace some of its other electronic component imports from Japan, China and Korea. This implies that the capital cost of ZAR120,000,000 will be recovered in 60 months.

The investigating team informed Electo Co. that the proposal will be considered.

After your return from the trip to South Africa, the Chief Executive Officer (CEO) of MidTech, requests the following additional information to assist him with determining the extent of exchange

4. The banks of Australian and Canadian companies that purchase electronic tools from MidTech provides letters of credit and are required to conduct payment within 180 days after the goods have been shipped to them. Therefore, the banks issue bankers acceptance to MidTechs bank. There are currently two bankers acceptance that MidTech can request his bank to discount: Bankers acceptance one is from Canada. Its maturity value is $1,500,000 and it will mature in 45 days. The bankers acceptance commission is 1.35% and the market rate is 1.50%. The other bankers acceptance is from Australia. Its maturity value is $3,000,000 and it will mature in 120 days. The bankers acceptance commission is 0.95% and the market rate is 1.25%. The CEO mentions that MidTech pays an average of 1.1% on existing loans. He requires information of whether it is viable to discount any of the bankers acceptance or not. Calculate the bond equivalent rate that MidTech will receive for each of the bonds when they are discounted and compare it to the average cost of MidTechs debt to determine whether any of the bankers acceptances should be discounted.

In the process to answer all the letter of credit questions of the CEO, you have collected and summarised the following data:

Bankers acceptance that MidTech holds:	Time till maturity (Days)	Maturity value	Acceptance commission	Market rate
B/A for export to Canadian company	45	$1,500,000	1.35%	1.5%
B/A for export to Australian company	120	$3,000,000	0.95%	1.25%
Existing average interest cost of debt for MidTech = 1.1%

Instructions:

Complete the separate Case Study answer sheet to respond to the questions of the CEO in this scenario.

Calculate the value of the Canadian bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the discounted value of the Canadian bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the bond equivalent rate of the Canadian bankers acceptance by applying the correct formula in the space below: (2 marks)

Should the Canadian bankers acceptance be discounted if you compare it to the average cost of existing loans to MidTech? Provide one reason for your answer in the space below: (1 mark)

Calculate the value of the Australian bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the discounted value of the Australian bankers acceptance at maturity by applying the correct formula in the space below: (2 marks)

Calculate the bond equivalent rate of the Australian bankers acceptance by applying the correct formula in the space below: (2 marks)

Should the Australian bankers acceptance be discounted if you compare it to the average cost of existing loans to MidTech? Provide one reason for your answer. (1 mark)