Marula Breweries of Limpopo, South Africa, has received an order for 10 000 cartons of beer from Alicante Importers of Alicante, Spain. The beer will be exported to Spain under the terms of a letter of credit issued by a Madrid bank on behalf of Alicante Importers. The letter of credit specifies that the face value of the shipment, US$720 000, will be paid 90 days later, after the Madrid bank accepts a draft drawn by Marula Breweries in accordance with the terms of the letter of credit. The current discount rate on a three-month banker’s acceptance is 8% per annum, and Marula Breweries estimates its weighted average cost of capital to be 20% per annum. The commission for selling a banker’s acceptance in the discount market is 1.2% of the face amount. How much cash will Marula Breweries receive from the sale if it holds the acceptance until maturity? Do you recommend that Marula Breweries hold the acceptance until maturity, or discount it at once in the U.S. banker’s acceptance market?
Marula Breweries of Limpopo, South Africa, has received an order for 10 000
cartons of beer from Alicante Importers of Alicante, Spain. The beer will be exported
to Spain under the terms of a letter of credit issued by a Madrid bank on behalf of
Alicante Importers. The letter of credit specifies that the face value of the shipment,
US$720 000, will be paid 90 days later, after the Madrid bank accepts a draft drawn
by Marula Breweries in accordance with the terms of the letter of credit.
The current discount rate on a three-month banker’s acceptance is 8% per annum,
and Marula Breweries estimates its weighted average cost of capital to be 20% per
annum. The commission for selling a banker’s acceptance in the discount market is
1.2% of the face amount.
How much cash will Marula Breweries receive from the sale if it holds the
acceptance until maturity? Do you recommend that Marula Breweries hold the
acceptance until maturity, or discount it at once in the U.S. banker’s acceptance
market?
Step by step
Solved in 6 steps with 2 images
