Reference no: EM132970584

Question: HighTech is a multinational U.S.A. company that performs diverse activities. It manufactures electronic tools like hand-held digital electronic veniers, digital multimeters, voltage testers etc.

To conduct this manufacturing they import certain electronic components from countries like Japan and South Korea.

The market for the manufactured tools are the U.S.A, Australia, Canada and United Kingdom (U.K). However, the majority of sales is in the U.K. Therefore, the company has already put up a subsidiary in the U.K. It resells and distribute the products to different businesses. The quarterly net profit after tax generated by the subsidiary is £500,000. The exports to Canada and Australia are to other independent distributing companies that buys the tools at wholesale prices from HighTech.

HighTech is also considering the construction of an electronic component manufacturing plant in the U.S.A. to eliminate the risks and costs associated with the current importing of electronic components from countries like Japan and South Korea.

HighTech already has sufficient manufacturing space available and only has to import manufacturing equipment of 63,000,000 Yen from Japan. The installation of the machinery will be conducted by local U.S.A. companies and will cost $1,000,000.

The Chief Executive Officer (CEO) of HighTech, requests the following information to assist him with determining the extent of exchange rate risk and the availability of funds to conduct the multinational transactions:

The banks of Australian and Canadian companies that purchase electronic tools from HighTech provides letters of credit and are required to conduct payment within 180 days after the goods have been shipped to them. Therefore, the banks issue bankers acceptances to HighTech's bank. There are currently two bankers acceptances that HighTech can request his bank to discount: Bankers acceptance one is from Canada. It's maturity value is $1,500,000 and it will mature in 45 days. The bankers acceptance commission is 1.35% and the market rate is 1.50%. The other bankers acceptance is from Australia. It's maturity value is $3000,000 and it will mature in 120 days. The bankers acceptance commission is 0.95% and the market rate is 1.25%. The CEO mentions that HighTech pays an average of 1.1% on existing loans. He requires information of whether it is viable to discount any of the bankers acceptances or not. Calculate the bond equivalent rate that HighTech will receive for each of the bonds when they are discounted and compare it to the average cost of HighTech's debt to determine whether any of the bankers acceptances should be discounted.

In the process to answer all the letter of credit questions of the CEO, you have collected and summarised the following data:

Calculate the value of the Canadian bankers acceptance at maturity by applying the correct formula in the space below:

Calculate the discounted value of the Canadian bankers acceptance at maturity by applying the correct formula in the space below:

Calculate the bond equivalent rate of the Canadian bankers acceptance by applying the correct formula in the space below:

Should the Canadian bankers acceptance be discounted if you compare it to the average cost of existing loans to HighTech?