Chapter 19: Small Business Dilemma
Ensuring Payment for Products Exported by the Sports Exports Comapny
The sports exports company produces footballs and exports them to a distributor in the United Kingdom. It typically sends footballs in bulk and then receives payment after the distributor receives the shipment. The business relationship with the distributor is based on trust. Although the relationship was worked thus far, Jim Logan, the owner of the sports exports company, is concerned about the possibility that the distributor will not make its payment.
1. How could Logan use a letter of credit to ensure that he will be paid for the products he exports?
2. Logan has discussed the possibility of expanding his exports business through a second sporting goods distributor in the UK, this second distributor would cover a different territory than the first distributor. The second distributor is only willing to engage in a consignment arrangement when seeling footballs to retail stores. Explain the risk to Logan beyond the typical risk he incurs when dealing with the first distributor. Should he pursue this type of businesS?
Chapter 20: Question 8 and Small Business Dilemma
8. Break-Even financing
Providence Co. needs dollars. Assume that the local 1-year loan rate is 15 percent, while a 1-year loan rate on euros is 7 percent. By how much must the euro appreciate to cause the loan in euros to be more costly than a U.S. dollar loan?
Small business dilemma:
Short-term financing by the sports exports company
At the current time, the sports exports company focuses on producing footballs and exporting them to a distributor in the United Kingdom. The exports are denominated in British pounds. Jim Logan, the owner, plans to develop other sporting goodss products besides the footballs that he produces. his entire expansion will be focused on the United Kingdom, where he is trying to make a name for his firm. He remains concerned about his firm’s exposure to excahnge rate risk but does not plan to let that get in the way of his expansion plan to let that get in the way of his expansion plan because he believes that his firm can continue to penetrate the British sporting goods market. He has just negotiated a joint venture with a British firm that will produce other sporting goods products that are more popular in the United States (such as basketballs) but will be sold in the United Kingdom. Logan will pay the British manufacturer in British pounds. These products will be delivered directly to the British distributor rather than to Jim, and the distributor will pay logan with british pounds.
Logan’s expansion plans will result in the need for additional funding. Logan would prefer to borrow on a short-term basis now. He has an excellent credit rating and collateral and therefore should be able to obtain short-term financing. The british interest rate is one-fourth of a percentage point above the U/S interest rate.
1. Should Logan borrow dollars or pounds to finance his joint venture business? why?
2. Logan could also borrow euros at an interest rate that is lower than the U.S. or British rate. The values of the euro and pound tend to move in the same direction against the dollar but not always by the same degree. would borrowing euros to support the british joint venture result in more exposure to exchange rate risk than borrowing pounds? would it result in more exposure to excahnge rate risk than borrowing dollars?
