Inca Breweries of Lima, Peru, has received an order for 10,000 cartons of beer from Alicante Importers
Question:
Inca Breweries of Lima, Peru, 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, $720,000 U.S. dollars, will be paid 90 days after the Madrid bank accepts a draft drawn by Inca Breweries in accordance with the terms of the letter of credit.
The current discount rate on 3-month bankers’ acceptance is 8% per annum, and Inca Breweries estimates its weighted average cost of capital to be 20% per annum. The commission for selling a bankers’ acceptance in the discount market is 1.2% of the face amount.
a. What is the difference, in present value terms, between holding the acceptance to maturity versus selling the banker’s acceptance today in the money market?
b. What would you recommend Inca Breweries do?
Step by Step Answer:
Multinational Business Finance
ISBN: 9781292445960
16th Global Edition
Authors: David Eiteman, Arthur Stonehill, Michael Moffett