Question

KOMSIS TRADING CO is a Turkish Company who imports MUSIC-SETS from China. KOMSIS is going decide on options of this import. For realization of import KOMSIS will have different options on financing.

Now, you are preparing a presentation to the Board of the company. They will listen to your presentation and decide on which is the best option.

You are the Finance Manager and you will present the expected costs and possible revenues from this deal. Please explain, make comparison of all financing options in detail and propose the board, the most profitable option.

GENERAL TERMS

• The music sets have same configuration. No variaties in configuration.
• KOMSIS has strong financial reputation in the market and a very good network in the country to sell the goods with good profit margin.
• KOMSIS can sell goods in TL or Foreign Currency (FCY).
• KOMSIS doesn’t have any problem to sell the music sets. They can sell them any time, with any method which is more profitable for them. Importing is the same, they can make imports with any method they want.

IMPORT DETAILS

• KOMSIS is buying 10.000 music sets , cost per set is $ 400 FOB.
• Transportation of the music sets from China to Turkey will cost $ 112.750 It is payable at Documents Receipt date by Akbank , in TL countervalue of $ amount.
• Insurance will be $ 40.250 which is also payable at document receipt date and in TL.
• All costs will be paid by KOMSIS.
• Transportation from airport to company warehouse will cost TL. 15.000
• Customs taxes and duties will be TL.665.000
• Transaction date is March 01. Everything will be settled on March 01.

FINANCING

• KOMSIS has 2 options of financing in their hand. Now management will decide on which transaction they will go for.
• Please use correct Foreign Exchange rate provided below for your calculations
• KOMSIS is working with AKBANK. They do not have any financing issues. They have enough money with the bank.
• In this environment, there are no other taxes   except Corporate/Income Tax of domestic sales profit. You dont need to calculate the Corporate tax.

CHOOSING BEST FINANCING OPTIONS

1. CASH AGAINST DOCUMENTS

• Seller wants Cash Against Documents payment on the transaction date.Documents are received by the bank on March 01.
• Therefore transaction date is March 01,2018
• AKBANK charges flat commission % 4.5 —for transfer. Transfer will be done on transaction date March 01.
• KOMSIS will pay all amounts from their TL account with AKBANK ( They have enough money in their account .)

2. LETTER OF CREDIT

• Komsıs is working with Akbank. Akbank charges following costs during L/C :
• L/C Opening commission 0.5 pct ( 0.005 )
• L/C Payment commission 1 pct (0.01)
• SWIFT Charges   $ 5 per message. ( Total 10 messages )

China Company is working with Bank of China. They are charging following costs

• L/C Advising Commission   1 pct ( 0.01)
• L/C Documents Reviewing Commission 0.5 pct ( 0.005 )
• SWIFT Charges   $ 7 per message ( 20 messages )

• AKBANK will charge KOMSIS $ 25.000 commission for payment to Chinese bank. Akbank will also charge $ 15.000 for themselves.
• Transferred amount and all other charges will be collected from KOMSIS’s Akbank account in Turkish Lira.
• Transaction date is : March 01,2018

QUESTION : WHICH OPTION IS BETTER ?

SALE PRICE CALCULATION WHEN GOODS ARE SOLD

1. Goods will be sold to a client with % 50 profit margin calculated on CIF value of the goods.

QUESTION : WHAT IS THE SALE PRICE OF IMPORTED GOODS ?

DISCOUNTING CHEQUE

1. The customer pays in USD. by a cheque maturity 1 year. Komsis takes this cheque to a factoring company for discounting.
2. Factoring company applies % 6 discounting rate to the face value of the cheque. They also charge % 1.5 commission on the cheque amount.
3. They will pay Komsis in $.

QUESTION : A. What is the discounted value of the cheque ?

                       B. How much will factoring company pay to Komsis ?

FORIGN CURRENCY EXCHAGE
		FX RATES		BANK NOTE RATES
USD / TL	DATE	BUY RATE	SELL RATE	BUY RATE	SELL RATE
	01.03.2018	3,8082	3,8150	3,8055	3,8208

Answer 1

Part A answer

Cash against documents charges an upfront fees of 4.5%

In case of LETTER OF CREDIT, the total fees adds up to = L/C Opening commission 0.5% + L/C Payment commission 1% + SWIFT Charges ($ 5 per message x Total 10 messages ) + L/C Advising Commission 1% + L/C Documents Reviewing Commission 0.5% + SWIFT Charges ($ 7 per message x 20 messages ) + $ 25.000 commission for payment to Chinese bank +  Akbank will also charge $ 15.000 for themselves = 3.0% + $ 230

So, If the transaction value is T then Letter of credit cost will be lower if 3% x T + 230 < 4.5% x T or if T > 230 / (4.5% - 3.0%) = $ 15,333

Thus, for higher transaction value, cost of letter of credit will be lesser than the cash against document option

Borrower will have a better control over the transaction through letter of credit.

Hence, from borrower perspective, the letter of credit option is better

2. SALE PRICE CALCULATION WHEN GOODS ARE SOLD

As CIF value of the imported goods is not mentioned, assuming it to be $100

Adding 50% profit margin on the CIF value of the imported goods, the sales price of the goods will be $150.

3. DISCOUNTING CHEQUE

suppose the cheque amount is $100, discounted value of the cheque = 100 (1-0.06) = $94

factoring company pay to Komsis = 100 (1-0.06-0.015) = $92.5