QUESTION

Leather goods machinery - the soft touch?

A medium size specialty leather goods designer and manufacturer, Tuscany Leather

Productions (TLP), located in a large town outside Florence has had good success in

developing their own line of gloves, handbags and other accessories, and has distributed

them across Europe. Cross border transactions have been facilitated by documentary

collections and open account. TLP has experienced occasional delays in payment, but

they have been satisfied with the overall results and are anxious to expand production

and export outside Europe to increase revenue. Much of TLPs success has been their

unique designs due to the specialty machinery and processes they have developed.

TLP was recently approached by a large leather manufacturing company in Korea,

Korean Soft Goods Manufacturing (KSM,) to purchase one or more of TLPs specialty

machines and to enter into an agreement to implement and monitor the unique processes

in the Korean factories.

Reaction

The sale of specialized machinery and processes is not something TLP had planned or

anticipated. The approach from KSM was unexpected, but exciting and flattering. The

price of more than US$1 million for the entire contract was also very tempting. TLP did

not have detailed knowledge of KSM but they had heard of them in the market and were

familiar with the goods they produced.

One of the first challenges for the Italians was how to produce the machinery in the

timeframe discussed and how this would affect their limited financial and physical

resources. The impact on normal production was considered and TLP concluded that

they could manage with the addition of part-time factory workers. Having decided they

had the physical capability, TLP approached their local bank for advice on how to finance

the production of the new machinery and on how best to secure the sale to the Koreans.

The local bank had little experience in international transactions outside Europe but TLP

had a long history with this bank, Banca di Toscana (BT) and relied on them from the

inception of TLP for advice and financing. They were content to accept advice - and

financing - from their longstanding bankers. After a visit to Korea by senior management

from TLP to meet their counterparts and tour the factory, the companies agreed to enter

into a contract together in the form of a Purchase Order.

The Deal

While the Koreans had expressed an interest in more than one machine, TLP wanted to

test themselves, and KSM, by only agreeing to sell one machine at a price of US$720,000

plus implementation and monitoring services extended over a period of one year, for an

additional US$280,000. TLP required a documentary letter of credit to be issued by a

Korean bank and to be confirmed by Banca di Toscana for a total of US$1 million. The

letter of credit was to be valid for the life of the transaction, including progress payments

for the services portion.

Cracks below the surface

Based on the signed purchase order the Italian Company was able to secure pre-export

financing from their bank for about 50% of the sale price of the machinery to be disbursed

at different stages, most importantly, when the letter of credit arrived. TLP began

preparations, purchased raw materials and finalized the design of the new machine and

was anxious to receive the letter of credit.

Later, when they inquired of the Korean Company about the status of the letter of credit,

KSM informed them that they were awaiting the issuance of a performance bond by TLPs

bank. The provision of a performance bond had not been previously discussed, but KSM

were insistent it be issued before they would authorize the issuance of a letter of credit.

TLPs bank was not pleased with the news that the company would be required to utilize

a larger portion of their existing line of credit to secure the performance bond. They

cautioned TLP that this would impact the size of the pre-export loan. The bank further

advised that a per annum fee of 3% of the value of the US$200,000 performance bond

would be applied. The performance bond was to be valid for six months beyond the

finalization of the contract.

A week following the issuance of the performance bond a letter of credit was received by

Banca di Toscana, issued by a small Korean bank. The issuing bank asked the Italian

advising bank to add its confirmation before sending it to the beneficiary. The issuing

bank was not known to BT and they did not have any pre-established credit limits in place

for this bank, which would have allowed them to confirm the letter of credit.

TLP, while naive and unfamiliar about the full workings of letters of credit, insisted they

would not ship unless the letter of credit was confirmed. Their bank in turn successfully

sought another bank which would be prepared to assume the issuing bank and country

risk and BT sold the underlying risk to this third bank. Given the perceived higher risk of

the issuing bank and the need to involve two banks in the confirmation process, the fees

were almost twice as much as expected by the Italian Company.

Moving ahead

Production proceeded, but slower than planned, requiring the expiry and shipping dates

of the D/C to be amended. Financing from BT was not as much as promised or expected.

They were concerned about production and the impact the project was having on normal

business activities, including sales. Individual owners of TLP were required to contribute

cash to the project and to provide added security to the bank.

Shipment of the machine took place three months later than originally planned. The

services of logistics specialists and a freight forwarder were acquired only three weeks

before shipment. The costs associated with these service providers were unplanned.

Documents were presented to the bank for negotiation (payment) one week before the

expiry date.

All the documents were checked carefully by BT, and a number of discrepancies were

found, including "late shipment". The bank refused to honour their confirmation

undertaking because of the discrepancies and would not pay the beneficiary unless the

issuing bank approved the discrepancies. TLP was certain, given the relationship they

had developed with KSM that the Korean company would waive the discrepancies and

authorize payment, in effect accepting the documents as tendered. The next day TLP

was contacted by KSM to express their disappointment with the delay in shipment and

the other discrepancies. They insisted on a reduction in the price of US$20,000 before

they would waive the discrepancies and authorize payment.

Tuscany Leather Productions was now faced with a situation which grew more serious by

the day; the entire project had consumed more time and resources than expected or

planned, and the cost of financing and other fees far exceeded expectations. Now the

goods were on the high seas, approaching Korea and the buyer was threatening to

withhold payment unless TLP agreed to a substantial reduction in the price. Refusal to

agree to the reduction could result in the goods being held in Korea and returned to Italy

if another buyer could not be found, which would be difficult given the specialized nature

of the machinery. High continuing demurrage charges (storage charges) would be

incurred.

4. Given the scenario that has developed in this transaction and the position TLP is

facing, which of the following options would you choose, and why?

question

While commuting to work, Sherry was side-swiped by a semi-truck on I-75. Luckily, she was not injured, however, the car was totaled. Bo and Sherry have no choice; but, to purchase a new vehicle. As home owner's, they decided that a truck would be the more practical transportation option for them. So, after "truck shopping" over a weekend, they purchased a 2017 Ford Ranger for $26,200. Upon arriving at the dealership to sign the loan forms and pick up the truck, they became aware that they were required to pay tax and license fees of $1,700. Bo and Sherry used the insurance settlement from the accident totaling $3,200 as a down-payment on the truck loan. As a result, they borrowed $23,000 at 9% interest for 5 years with monthly payments of $477.44.

Question 6: How much will Bo and Sherry pay for the truck, including tax and license fees and finance charges.

Bo and Sherry called their insurance company to arrange for insurance coverage for the new truck. The insurance company gave them the option to pay the $360 six-month premium now, or with 6 monthly payments of $67.50, starting today.

Question 7: Bo and Sherry decided to take the option to pay with the installment plan, what APR did they pay?

One of Bo and Sherry's long-term goals was to start their own business. Given Bo's level of expertise in repairing equipment, they decided to start a repair business and originally estimated that it will take $25,000 to get the business started. They had $5,000 set aside, and decided to deposit, plus and an additional $400 at the end of each month. They deposited the money into an investment account that would earn 6% compounded monthly.

Question 8: How many months did it take Bo and Sherry to save enough money to start their business?

How do Banks improves their liquidity? a. By purchasing more assets of the bank b. By reducing the interest rates on loan c. By increasing the profit rates on saving accounts d. By generating additional income from investment Question 44 Not yet answered Marked out of 1.00 Flag question Insurance companies received the funds through a. Selling shares b. Selling units c. Underwriting business. d. Selling productsQUESTION 9 The Swindand Industrial Classification (SIC. code is a classification system based upon which of the following? A. The way In which a business standardizes its operations according to 150 90001 B. The insurance industry classification of a company's risk adjusted status for tating its promit Tis C A federal government classification according to the major business activity of service within which the firm operates- D. The Standard insurance classification for grouping the riskiness of insuring a company's employee population Click Save and Sthanit to save and submit Cuck Save All Answers to save off answers.QUESTION 2 Joe Exotic purchased a 4-year insurance policy for $15.000 on March 3ist, 2019. He paid the full amount upfront in cash. Which of the following represents the appropriate adjusting entry on December 31st. 2019? O Debit Insurance Expense for $2 750. Credit Prepaid Insurance for $2 750. O Debit Insurance Expense for $2 813. Credit Prepaid Insurance for $2 813 Debit Insurance Expense for $3.750. Credit Prepaid Insurance for $3750 O Debit Prepaid Insurance for $3.125. Credit Insurance Expense for $3,125. Are All Arnavent Click Save and Submit to save and submit. Click Save All Answers to save all answers. W A e DELL FAL FB F7 F5 F4 F2 81Question 5 (7.5 points) Fortunitas is an insurance company that specializes in providing insurance for small businesses. The managers at this company want to examine the instances of insurance fraud to determine which factors determine whether a client will commit fraud. From past data it is known that 30% of all claims were fraudulent and the rest legitimate. It also knows that 80% of fraudulent claims were submitted by new businesses, while 30% of legitimate claims were submitted by new businesses. a.) Fortunitas receives an insurance claim from a new business. The manager at Fortunitas, looking at the information above, decides to red-flag this claim as highly likely to be fraudulent. His report concerning his decision justies this by noting that 80% of fraudulent claims are submitted by new businesses. ls justification valid, why or why not? b.) If you answered in {a} that his justication is valid, determine the likelihood of committing a fraud from an old business. If you responded that his claim was invalid, then identify the correct statistic that needs to be used in his report