L.A. Cellular has received an order for phone switches from Singapore. The switches will be exported under the terms of a letter of credit issued by Sumitomo Bank on behalf of Singapore Telecommunications. Under the terms of the L/C, the face value of the export order, $12 million, will be paid six months after Sumitomo accepts a draft drawn by L.A. Cellular. The current discount rate on six-month acceptances is 8.5% per annum, and the acceptance fee is 1.25% per annum. In addition, there is a flat commission, equal to 0.5% of the face amount of the accepted draft that must be paid if it is sold.
a. How much cash will L.A. Cellular receive if it holds the acceptance until maturity?
b. How much cash will it receive if it sells the acceptance at once?
c. Suppose L.A. Cellular's opportunity cost of funds is 8.75% per annum. If it wishes to maximize the present value of its acceptance, should it discount the acceptance?

  • CreatedJune 27, 2014
  • Files Included
Post your question