Chap12 Pbms MBF12e - Problem 12.1 Kona Macadamia Nuts Kona...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Problem 12.1 Kona Macadamia Nuts a. How much should Kona borrow in yen? Kona receives cash collections of one hundred million yen per month. This is the source of repayment of any balance sheet hedge. If Kona wants to be covered for one year at a time, it would need to borrow one year's cash flow plus interest, and convert the borrowed yen to US dollar at once. A sample calculation would be: Sample Values Units One month's cash flow 100,000,000 Yen Months per year 12 One year's cash flow 1,200,000,000 Yen Plus interest 4.000% per annum Principal and interest 1,248,000,000 Yen Spot exchange rate 125.00 Yen/US$ US dollars $9,984,000 US$ Realistically, Kona would probably want to be covered for the long term. In that case, the 1.2 billion yen loan could be structured so that it could be renewed annually with interest reset annually. This would only cover the foreign exchange and interest rate risk for a year at a time, but would probably be acceptable to a bank lender. Also unknown are the expected sales for year 2 and beyond. b. What should be the terms of payment on the loan? The loan should be repaid out of the monthly cash flow, with payments on principal only. The interest payment one year hence has already been covered by borrowing both principal and interest up-front. Note: Kona should not borrow 250 million yen to cover only its balance sheet exposure. Such a loan would cover only the accounting exposure, and not the cash flow exposure (operating exposure). Kona Macadamia Nuts, based in Hilo, Hawaii, exports Macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to Japanese customers of ¥1,200,000,000. At the present exchange rate of ¥125/$ this is equivalent to $9,600,000. Sales are relatively equally distributed during the year. They show up as a ¥250,00,000 account receivable on Kona’ balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically ¥100,000,000. Kona Macadamia Nuts would like to hedge its yen receipts, but it has too many customers and transactions to make it practical to sell each receivable forward. It does not want to use options because they are considered to be too expensive for this particular purpose. Therefore, they have decided to use a “matching” hedge by borrowing yen.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Problem 12.2 Newport Lifts (A) Assumptions Values Sales volume per year 10,000 US dollar price per unit $24,000 Direct costs as % of US$ sales price 75% Direct costs per unit $18,000.00 Spot exchange rate, yuan/$ 8.2000 Expected spot rate, yuan/$ 9.2000 Unit volume decrease if price increased -10% Case 1 Case 2 Sales to China Same Yuan Price Same US$ Price US dollar price per unit $21,391.30 $24,000.00 Unit volume 10,000 9,000 Sales revenue $213,913,043 $216,000,000 Less direct costs ($180,000,000) ($162,000,000) Gross profits $33,913,043 $54,000,000 Better. Newport Lifts (USA) exports heavy crane equipment to several Chinese dock facilities. Sales are currently
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/10/2012 for the course ACCOUNTING 5450 taught by Professor Brown during the Spring '12 term at Colorado Technical University.

Page1 / 10

Chap12 Pbms MBF12e - Problem 12.1 Kona Macadamia Nuts Kona...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online