Brent Bush, CFO of a medical device distributor, BioTron Medical, Inc., was approached by a Japanese customer,

Question:

Brent Bush, CFO of a medical device distributor, BioTron Medical, Inc., was approached by a Japanese customer, Numata, with a proposal to pay cash (in yen) for its typical orders of ¥12,500,000 every other month if it were given a 4.5% 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. Should Brent Bush accept Numata's proposal?

Spot rate:............................¥111.40/$

30-day forward rate:...............¥111.00/$

90-day forward rate:...............¥110.40/$

180-day forward rate:.............¥109.20/$

Numata's WACC.....................8.850%

BioTron's WACC....................9.200%

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...