Ex10-Transaction Exposure
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Problem 10.1 BioTron Medical, Inc.
¥111.40/$ ¥111.00/$ ¥110.40/$ ¥109.20/$ Numata's WACC
8.850%
BioTron Medical's WACC
9.200%
Assumptions
Values
BioTron's 30-day account receivable, Japanese yen
12,500,000 111.40 111.00 110.40 109.20 Numata's WACC
8.850%
BioTron Medical's WACC
9.200%
Desired discount on purchase price by Numata
4.500%
Brent Bush should compare two basic alternatives, both of which eliminate the currency risk.
1. Allow the discount and receive payment in Japanese yen in cash
Brent Bush, CFO of a medical device manufacturer, BioTron Medical, Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical orders of ¥12,500,000 every other month if it were given a 4.5% discount. Numata's current terms are 30 days with no discounts. Using the following quotes and estimated cost of capital for BioTron, Bush will compare the proposal with covering yen payments with forward contracts.
Spot rate, ¥
/$
30-day forward rate, ¥
/$
90-day forward rate, ¥
/$
180-day forward rate, ¥
/$
How much in U.S. dollars will BioTron Medical receive 1) with the discount and 2) with no discount but fully covered with a forward contract?
Spot rate, ¥/$
30-day forward rate, ¥/$
90-day forward rate, ¥/$
180-day forward rate, ¥/$
Account recievable (yen)
12,500,000 Discount for cash payment up-front (4.500%)
562,500 Amount paid in cash net of discount
11,937,500 Current spot rate
111.40 Amount received in U.S. dollars by Seattle Scientific
$ 107,158.89 2. Not offer any discounts for early payment and cover exposure with forwards
Account receivable (yen)
12,500,000 30-day forward rate
111.00 Amount received in cash in dollars, in 30 days
$ 112,612.61 Present value of amount received
$ 111,755.82
Problem 10.2 Bobcat Company
Assumptions
Values
Purchase price of Korean manufacturer, in Korean won
7,500,000,000 Less initial payment, in Korean won
(1,000,000,000)
Net settlement needed, in Korean won, in six months
6,500,000,000 Current spot rate (Won/$)
1,110 Six month forward rate (Won/$)
1,175 Bobcat's cost of capital (WACC)
10.00%
Options on Korean won:
Call Option
Put Option
Strike price, won
1,200.00 1,200.00 Option premium (percent)
3.000%
2.400%
United States
Korea
Six-month investment (not borrowing) interest rate (per annum)
4.000%
16.000%
Borrowing premium of 2.000%
2.000%
2.000%
Six-month borrowing rate (per annum)
6.000%
18.000%
Bobcat Company, U.S.-based manufacturer of industrial equipment, just purchased a Korean company that produces plastic nuts and bolts for heavy equipment. The purchase price was Won7,500 million. Won1,000 million has already been paid, and the remaining Won6,500 million is due in six months. The current spot rate is Won1,110/$, and the 6-
month forward rate is Won1,175/$. The six-month Korean won interest rate is 16% pe annum, the six-month US dollar rate is 4% per annum. Bobcat can invest at these interest rates, or borrow at 2% per annum above those rates. A six-month call option on won with a 1200/$ strike rate has a 3.0% premium, while the six-month put option at the same strike rate has a 2.4% premium. Bobcat can invest at the rates given above, or borrow at 2% per annum above those rates. Bobcat's weighted average cost of capital is 10%. Compare alternate ways that Bobcat might deal with its foreign exchange exposure. What do you recommend and why?
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Risk Management Alternatives
Values
Certainty
1. Remain uncovered, making the won payment in 6 months
at the spot rate in effect at that date
Account payable (won)
6,500,000,000 Possible spot rate in six months: current spot rate (won/$)
1,110 Cost of settlement in six months (US$)
$ 5,855,855.86 Account payable (won)
6,500,000,000 Possible spot rate in six months: forward rate (won/$)
1,175 Cost of settlement in six months (US$)
$ 5,531,914.89 2. Forward market hedge. Buy won forward six months
Account payable (won)
6,500,000,000 Forward rate (won/$)
1,175.00 Cost of settlement in six months (US$)
$ 5,531,914.89 3. Money market hedge. Exchange dollars for won now, invest for six months.
low risk security
Account payable (won)
6,500,000,000 Discount factor at the won interest rate for 6 months
0.92593 Won needed now (payable/discount factor)
6,018,518,518.52 Current spot rate (won/$)
1,110.00 US dollars needed now
$ 5,422,088.76 Carry forward rate for six months (WACC)
10.000%
US dollar cost, in six months, of settlement
$ 5,693,193.19 4. Call option hedge. (Need to buy won = call on won)
If exercised
If not exercised
Option principal
6,500,000,000 Current spot rate (won/$)
1,110.00
Premium cost of option (%)
3.000%
Option premium (principal/spot rate x % pm)
$ 175,675.68 If option exercised/not exercised, dollar cost of won
$ 5,416,666.67 Premium carried forward six months (using WACC)
184,459.459 Total net cost of call option hedge if exercised
$ 5,601,126.13 Maxi
Problem 10.4 P & G India
Assumptions
Values
180-day account payable, Japanese yen (¥)
8,500,000 Spot rate (¥/$)
120.60 Spot rate, rupees/dollar (Rs/$)
47.75 Implied (calculated) spot rate (¥/Rs)
2.5257 (120.60 / 47.75) 2.4000 2.6000 180-day Indian rupee investing rate
8.000%
180-day Japanese yen investing rate
1.500%
Currency agent's exchange rate fee
4.850%
P & G India's cost of capital
12.00%
Spot Risk
Hedging Alternatives
Values
Rate (¥/Rp)
Assessment
1. Remain Uncovered, settling A/P in 180 days at spot rate
If spot rate in 180 days is same as current spot
3,365,464.34 If spot rate in 180 days is same as forward rate
$ 3,541,666.67 If spot rate in 180 days is expected spot rate
3,269,230.77 Proctor and Gamble’s affiliate in India, P & G India, procures much of its toiletries product line from a Japanese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P & G India wishes to hedge a 8.5 million Japanese yen payable. Although options are not available on the Indian rupee (Rs), forward rates are available against the yen. Additionally, a common practice in India is for companies like P & G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 4.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy. 180-day forward rate (¥/Rs)
Expected spot rate in 180 days (¥/Rs)
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2. Buy Japanese yen forward 180 days
Settlement amount at forward rate (Rs)
3,541,666.67 3. Money Market Hedge
8,500,000.00 discount factor for yen investing rate for 180 days
0.9926 8,436,724.57 2.5257 Indian rupee, current amount (Rs)
3,340,411.26 Future value of money market hedge (Rs)
3,540,835.94 4. Indian Currency Agent Hedge
8,500,000.00 2.5257 Current A/P (Rs)
3,365,464.34 Plus agent's fee (4.850%)
163,225.02 P & G India's WACC carry-forwad factor for 180 days on fee
1.0600 Total future value of agent's fee (Rs)
173,018.52 Total A/P, future value, A/P + fee (Rs)
3,538,482.87 Principal A/P (¥)
Principal needed to meet A/P in 180 days (¥)
Current spot rate (¥/Rs)
Principal A/P (¥)
Current spot rate (¥/Rs)
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Consider the following information about two alternative credit strategies:
Refused Credit
Price per unit
Cost per unit
Grant Credit
P75
P71
P32
P33
Quantity sold per quarter
Probability of payment
6,200
6,900
1.0
.90
The higher cost per unit reflects the expense associated with credit orders, and the
higher price per unit reflects the existence of a cash discount. The credit period
will be 90 days, and the cost of debt is .75 percent per month.
Required:
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a.
b.
In (a), what does the credit price per unit have to be a break even?
c.
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CS
Flint Stone Works reported the following accounts receivable at December 31, 2022. The company also provided its estimate of the
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Customer
GVSU
MSU
Other customers
Totals
Estimated %
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$150,000
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$128,000
Current
(D) $22,000
$10,000
SO
$0
$10,000
0%
1-30 Days
Past Due
SO
SO
SO
SO
1%
What should Flint Stone Works report as its gross accounts receivable at December 31, 20227
31-60 Days 61-90 Days
Past Due
Past Due
SO
SO
SO
SO
2%
SO
SO
$40,000
$40,000
5%
Over 90
Days Past
Due
SO
$20,000
$80,000
$100,000
20%
Total
$10,000
$20,000
$120,000
$150,000
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$30,000
$170,000
$200,000
$300,000
Question 37
Based on the information from Question 36, what is the average level of the company’s total trade credit?
$170,000
$200,000
$300,000
$500,000
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$170,000
$200,000
$300,000
$500,000
Question 39
Based on the information from Question 36, what is the nominal annual cost of the firm’s costly trade credit?
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2 Loan Amount
3 Annual Interest Rate
4 #times per year interest accrued
5 Periodic Rate
6
Term (years)
7
#payments per year
8 Number of payments
9
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10 Points paid at origination to get loan
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$19,300
$20,000
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48
Amount
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Total of monthly
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Total finance
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APR
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120
120
Monthly return
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2.00%
Credit terms
n/a
Net 30
% Uncollectable
n/a
3.00%
Assume the customer will either pay in 30 days or will default.
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9
10
11
12
13 $500 Fixed Fee, 2% commission
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D
200
100
50
E
F
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5006
500
4960
500
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500
5300
G
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- Calculate (a) the amount financed, (b) the total finance charge, and (c) APR by table lookup. (Use Table 14.1 and Table 14.1(b).) (Do not round intermediate calculations. Round the "Finance charge" to the nearest cent.) Number of monthly Total of monthly Purchase price of a used car Amount Total finance Down payment APR payments financed payments charge 5,453 $ 1,113 48 24 5,509.76 acer %24 %24arrow_forwardFirst part onlyarrow_forwardF1arrow_forward
- Question 23 CS Flint Stone Works reported the following accounts receivable at December 31, 2022. The company also provided its estimate of the portion that it believes will not be collected for each category of aged receivable. Customer GVSU MSU Other customers Totals Estimated % Uncollectible $150,000 B) $137,200 $128,000 Current (D) $22,000 $10,000 SO $0 $10,000 0% 1-30 Days Past Due SO SO SO SO 1% What should Flint Stone Works report as its gross accounts receivable at December 31, 20227 31-60 Days 61-90 Days Past Due Past Due SO SO SO SO 2% SO SO $40,000 $40,000 5% Over 90 Days Past Due SO $20,000 $80,000 $100,000 20% Total $10,000 $20,000 $120,000 $150,000arrow_forwardQuestion 36 A company has daily purchases of $10,000 from its supplier. The supplier offers trade credit under the following terms: 3/20, net 50 days. The company finally chooses to pay on time (pay in the 50th day) but not to take the discount. We assume 365 days per year. What is the average level of the company’s free trade credit? ______ $30,000 $170,000 $200,000 $300,000 Question 37 Based on the information from Question 36, what is the average level of the company’s total trade credit? $170,000 $200,000 $300,000 $500,000 38 . Based on the information from Question 36, what is the average level of the company’s costly trade credit? $170,000 $200,000 $300,000 $500,000 Question 39 Based on the information from Question 36, what is the nominal annual cost of the firm’s costly trade credit? 28.6% 29.3% 33.5%…arrow_forwardBid 7.05 Ask EURUSD 1M FWD EURUSD 2M FWD 14.99 15.15 EURUSD 3M FWD 22.57 23.05 EURUSD 4M FWD 30.25 30.55 EURUSD 5M FWD 38.03 38.43 EURUSD 6M FWD 45.91 47.2 EUR/USD Spot 7.34 1.1320 1.1322 What is the average annualized forward premium/discount for the EUR if you use the 4M forward contract?arrow_forward
- QUESTION 5 A company can issue a 45-day $10 million commercial paper at a rate of 4.50%. It can reduce the rate to 4.35% if it is backed by a standby letter of credit (SBLC). A bank is willing to issue the SBLC for a fee of 10 basis points. The following is true: The fee for issuing the SBLC is $10,000 The net savings to the issuer is $1,250 The amount received by the issuer for the commercial paper without an SBLC is $9,945,625. The difference in the amount received by the issuer with and without the SBLC is $1,875. QUESTION 6 The following is true about loan…arrow_forwardF16 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 Loan Amount 3 Annual Interest Rate 4 #times per year interest accrued 5 Periodic Rate 6 Term (years) 7 #payments per year 8 Number of payments 9 Balloon (balance after final payment) 10 Points paid at origination to get loan 11 12 32 33 34 35 36 37 38 39 40 DA Home Insert Cut Copy Format 41 42 Paste 43 44 ▾ Ready Sheet1 ✓ fx A Page Layout Calibri (Body) ▼ 11 BIU Sheet2 ▼ Formulas + B $1,000,000.00 7.66% 12 0.64% 30 12 360 Data A- A ▾ C Review View $0.00 AKA "Fully Amortizing" 1.50% t D 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 22 EE E Wrap Text + Merge & Center ▾ Balance in (t): B_(t) $1,000,000.00 F X Project Custom Interest in (t+1): (i/m)*B_t $6,383.33 % % > G +.0 .00 Payment in (t+1) $7,102.03 .00 ➡.0 Conditional Format Formatting as Table H Balance in (t+1): B_(t+1) $999,281.30 $0.00 I Cell Styles J H Insert X H Delete K Format Principal paid in (t+1)(=PMT-INT) 圓 Q Search…arrow_forwardQUESTION 25 The face amount of accounts receivable for Rio Inc. is $20,000. It was estimated that 5% of the accounts will not be collected, cash discounts of $500 will be exercised, and $200 of sales returns will be experienced. The net realizable value of accounts receivable is $19,500 $19,300 $20,000 $18,300arrow_forward
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