Question
Swishing Shoe Company. Swishing Shoe Company of Durham. North Carolina, has recived an order for 50,000 cartons of athletic shoes from Southampton Footware, Ltd., of
Swishing Shoe Company. Swishing Shoe Company of Durham. North Carolina, has recived an order for 50,000 cartons of athletic shoes from Southampton Footware, Ltd., of England, payment to be in British punds sterling. The shoes will be shipped to Southampton Footware. The letter of credit specifies that the face value of the shipment, $400,000, will be paid 120 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 120-day bankers' acceptances is 12% per annum, and South-ampton Footware estimates its weighted avcerage cost of captial to be 18% per annum. The commission for selling a bankers' acceptance in the discount market is 2.0% of the face amount.
a. Would Swishing Shoe Company gain by holding the accptance to maturity, as compared to discounting the bankers' acceptance at once?
b. Does Swishing Shoe Company incur any other risks in this transaction?
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