Swishing Shoe Company (B). 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, 398,000, will be paid 150 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 150 -day bankers' acceptances is12% per annum and Southampton Footware estimates its weighted average cost of capital to be 17.3% per annum. The commission for selling a bankers' acceptance in the discount market is 2.1% 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?

c. Assume that Great Britain charges an import duty of 10.1% on shoes imported into the United Kingdom. Swishing Shoe Company discovers that it can manufacture shoes in Ireland and import them into Britain free of any import duty. What factors should Swishing consider in deciding to continue to export shoes from North Carolina versus manufacture them in Ireland?

(NOTE: Assume a 360-day year.)

(Select all the choices that apply.)

b. Does Swishing Shoe Company incur any other risks in this transaction? (Select all the choices that apply.)

c. Assume that Great Britain charges an import duty of 10.1% on shoes imported into the United Kingdom. Swishing Shoe Company discovers that it can manufacture shoes in Ireland and import them into Britain free of any import duty (Select all the choices that apply.)

If Swishing decides to open a plant and manufacture in Ireland, the following factors must be considered:

1. Corporate income tax rates in Ireland and the United States.

2. Present and possible future changes in shipping costs. (If Swishing had been using air freight before the terrorist attack on the Twin Towers in New York and the Pentagon, it might encounter a sharp rise in air freight rates afterward. Terrorist attacks and their aftermath can not be easily predicted, but the success of a foreign manufacturing venture versus exporting must consider the possibility of any kind of unpredictable structural changes.)

3. Expected production volume in Ireland relative to the designed manufacturing capacity of the new factory there. The cost of manufacturing shoes in Ireland will depend both on the volume for which that plant is designed and the percent of capacity expected to be used in the near future.

4. The cost of labor and material in Ireland, versus North Carolina; and the availability and level of education of potential workers.

5. The existence, or non-existence, of excess capacity in the North Carolina factory, both at present and in terms of expected future growth.

6. The political risk of investing in Ireland for the British market, should the type of political terrorism and anti-British feelings currently in Northern Ireland spread to the Republic of Ireland itself.

7. The possibility that valuable technology of a proprietary nature would be stolen. (This might seem unlikely in the Irish British context, but for other countries, it could be a significant factor.)

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 150 days after the bank has accepted it, Swishing Footware will received the face amount of 398,000 The present value of 398,000 received 150 days hence, discounted at Swishing's WACC is(Round to two decimal places.) Alternative 2: Swishing Shoes can sell the bankers' acceptance in today's London money market at a(n) 12% per annum discount The discount on the sale of acceptance is(Round to two decimal places.) Calculate the amount received now below: (Round to two decimal places.)