Swishing Shoe Company (A). Swishing Shoe Company of Durham, North Carolina, has received an order for 49,500 cartons of athletic shoes from Southampton Footware. Ltd. of England payment to be in British pounds sterling. The shoes will be shipped to Southampton Footware under the terms of a letter of credit issued by a London bank on behalf of Southampton Footware. The letter of credit specifies that the face value of the shipment, 397,000, will be paid 90 days after the London bank accepts a draft drawn by Southampton Footware in accordance with the terms of the letter of credit The current discount rate in London on 90-day bankers' acceptances is 11.8% per annum, and Southampton Footware estimates its weighted average cost of capital to be 17.9% per annum. The commission for selling a bankers acceptance in the discount market is 2.2% of the face amount a. Would Swishing Shoe Company gain by holding the acceptance to maturity, as compared to discounting the bankers' acceptance at once? b. Does Swishing Shoe Company incur any other risks in this transaction? (NOTE: Assume a 360-day year.) a. Would Swishing Shoe Company gain by holding the acceptance to maturity, as compared to discounting the bankers' acceptance at once? Alternative 1: If Southampton Footware holds the draft for 90 days after the bank has accepted it, Swishing Footware will received the face amount of 397,000. The present value of 397,000 received 90 days hence, discounted at Swishing's WACC is D. (Round to two decimal places.) Swishing Shoe Company (A). Swishing Shoe Company of Durham, North Carolina, has received an order for 49,500 cartons of athletic shoes from Southampton Footware. Ltd. of England payment to be in British pounds sterling. The shoes will be shipped to Southampton Footware under the terms of a letter of credit issued by a London bank on behalf of Southampton Footware. The letter of credit specifies that the face value of the shipment, 397,000, will be paid 90 days after the London bank accepts a draft drawn by Southampton Footware in accordance with the terms of the letter of credit The current discount rate in London on 90-day bankers' acceptances is 11.8% per annum, and Southampton Footware estimates its weighted average cost of capital to be 17.9% per annum. The commission for selling a bankers acceptance in the discount market is 2.2% of the face amount a. Would Swishing Shoe Company gain by holding the acceptance to maturity, as compared to discounting the bankers' acceptance at once? b. Does Swishing Shoe Company incur any other risks in this transaction? (NOTE: Assume a 360-day year.) a. Would Swishing Shoe Company gain by holding the acceptance to maturity, as compared to discounting the bankers' acceptance at once? Alternative 1: If Southampton Footware holds the draft for 90 days after the bank has accepted it, Swishing Footware will received the face amount of 397,000. The present value of 397,000 received 90 days hence, discounted at Swishing's WACC is D. (Round to two decimal places.)
