Thomas carson pupule travels owner believes the

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Thomas Carson, Pupule Travel’s owner, believes the Taiwan dollar will either remain stable or decline a little over the next 3 months. At the present spot rate of T$35/$, the amount of cash required is only $200,000 but even this relatively modest amount will need to be borrowed personally by Thomas Carson. Taiwanese interest-bearing deposits by non- residents are regulated by the government, and are currently set at 1.5% per year. He has a credit line with Bank of Hawaii for $200,000 with a current borrowing interest rate of 8% per year. He does not believe that he can calculate a credible weighted average cost of capital since he has no stock outstanding and his competitors are all also privately-owned without disclosure of their financial results. Since the acquisition would use up all his available credit, he wonders if he should hedge this transaction exposure. He has quotes from Bank of Hawaii shown in the table below. Analyze the costs and risks of each alternative, and then make a recommendation as to which alternative Thomas Carson should choose. The currency risk is eliminated, but since Thomas Carson would have to exchange the money up-front, it would require him to borrow the money, increasing his debt outstanding for the entire 3 months. This is a difficult decision. The forward contract appears to be the preferable choice, protecting him against an appreciating T$, and creating a certain cash purchase payment. The problem, however, will be whether the Bank of Hawaii will allow him to purchase a forward for the full $216,049.38, which is slightly above his credit line currently in- place. If his relatonship is good with the bank, they most likely would increase his line sufficiently to allow the forward contract.
Problem 11.2 Mauna Loa a. How much should Mauna Loa borrow in yen? Mauna Loa receives cash collections of one hundred million yen per month. This is the source of repayment of any balance sheet hedge. If Mauna Loa wants to be covered for one year at a time, it would need to borrow one year's cash flow plus interest, and convert the borrowed yen to US dollar at once. A sample calculation would be: Sample Values Units One month's cash flow 100,000,000 Yen Months per year 12 One year's cash flow 1,200,000,000 Yen Plus interest 4.000% per annum Principal and interest 1,248,000,000 Yen Spot exchange rate 125.00 Yen/US$ US dollars $9,984,000 US$ Realistically, Mauna Loa 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?

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