Q4: Please review the excerpt taken from real life situation faced by one of the MNCs operating in Pakistan some time back and answer the required questions. Short Form Case Study: BASF Pakistan Pvt. Ltd.(BASF) BASF wants to purchase Temperature Control Equipment for its warehouses that store textile and leather chemicals. Total cost of the equipment is USD 5 million (cost and freight included). To finance this acquisition, BASF has several alternatives that it can choose from. It can finance the purchase using its internal cash flows and pay down the sight letter of credit (LC) obligation over the next 20 days; or it can take a 5-year term loan from its bank. Spot exchange rate applicable in this transaction is PKR 98.50/USD 1.00, whereas 3-months forward exchange rate (forward contract) of PKR 101/USD applies. According to an internal assessment carried out at BASF, exchange rate parity is expected to decline to about PKR 96.00/ USD 1.00 over the next 3 months. While most banks are not willing to endorse this view completely, there is a general consensus in the market that Rupee-US Dollar parity is poised to decline over the next 3-months and that this exchange rate is overvalued. Term loan from Bank means that LC liability will be settled by term loan which has floating rate pricing structure based off 6-months KIBOR plus 250 bps without floor and cap; loan is repayable in equal semiannual installments to commence from 18th month from date of disbursal of loan. Assume that 6-months KIBOR is 10.50% and the same applies to this transaction. Over the next 3-months, it is expected to increase by 50 bps. Whilethe margin of 250 bps remains unchanged, base rate of KIBOR might increase by 50 bps. Therefore, overall cost of financing is expected to increase by 50 bps. BASF has a choice to take suppliers credit from BASF AG, Germany for a tenor ranging from 3-12 months. Required - Short Answer Questions (SAQs) : a) Calculate the total cost of purchasing the equipment, assuming BASF uses its own cash flows and retires the LC sight over the next 20-25 days. b) Assuming the company decides to take bank loan, calculate interest cost for the first 6 months. Assume that the loan is disbursed on Feb 2 and that the bank charges income using actual/actual calendar day convention with semi-annual period ending on June 30. c) Assuming BASF does not book the forward contract and instead takes Suppliers credit for 3 months from the parent company, BASF AG, Germany. Based on the information above, what exchange rate will apply and what will be the total cost of the equipment? d) What is the amount of cost savings between part a and b? e) Assume that you are working at BASF Pakistan as Head of Treasury. What advice and recommendation you would have given at the Management Committee (MANCOM) meeting specifically on the approach/choice of purchasing the equipment i.e., using internal cash flows; taking term loan from bank or taking suppliers credit for 3-months and keep the foreign exchange position open as stated above? Give cogent reasons to support your view point.