Question

Brent Bush, CFO of a medical device manufacturer, BioTron Medical, Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical orders of ¥15,000,000 every other month if it were given a 2.0% discount. Numata's current terms are 30 days with no discounts. Using the following quotes and estimated cost of capital for Numata, Bush will compare the proposal with covering yen payments with forward contracts.
			Spot rate, ¥/$		¥111.40/$
			30-day forward rate, ¥/$		¥115.00/$
			90-day forward rate, ¥/$		¥116.40/$
180-day forward rate, ¥/$		¥117.20/$
Numata's WACC		10.000%
BioTron Medical's WACC		12.000%

$131,957.

$147,000

Yen14,700,000

Yen131,957.

Answer 1

Answer : $131957

(1). Allow the discount and receive payment in Japanese yen in cash

Assumptions	Values
BioTron's 30-day account receivable, Japanese yen	¥15,000,000
Spot rate, ¥/$	¥111.40/$
30-day forward rate, ¥/$	¥115.00/$
90-day forward rate, ¥/$	¥116.40/$
180-day forward rate, ¥/$	¥117.20/$
Numata's WACC	10.000%
BioTron Medical's WACC	12.000%
Desired discount on purchase price by Numata	2.0%

Calculation of discount and receive payment in Japanese yen in cash

Account recievable (yen)	¥15,000,000
Discount for cash payment up-front (2.0%)	(3,00,000)
Amount paid in cash net of discount	¥14,700,000
Current spot rate	111.40
Amount received in U.S. dollars by Seattle Scientific	$131957	(¥14700000/111.40)