Purchase Solution

Financing foreign operations - credit risk

Not what you're looking for?

Ask Custom Question

Please work problems; formula and showing how to solve problem is most important (so I can see how to solve similar problems). Thanks

Texas Computers (TC) recently has begun selling overseas. It currently has thirty foreign orders outstanding, with the typical order averaging $2,500. TC is considering the following three alternatives to protect itself against credit risk on these foreign sales:

Request a letter of credit from each customer. The cost to the customer would be $75 plus 0.25 percent of the invoice amount. To remain competitive, TC would have to absorb the cost of the letter of credit.

Factor the receivables. The factor would charge a nonrecourse fee of 1.6 percent.
Buy foreign credit insurance. The insurer would charge a 1 percent insurance premium.

a. Which of these alternatives would you recommend to Texas Computers? Why?

b. Suppose that TC's average order size rose to $250,000. How would that affect
your decision?

Purchase this Solution

Solution Summary

The solution explains how to decide between a letter of credit or factoring receivables or buying foreign credit insurance

Solution Preview

Let us compare the costs of the three alternatives

1. Order size 2500

Letter of Credit Factor Insurance
Cost 0.25%+75 ...

Purchase this Solution


Free BrainMass Quizzes
Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.