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, will be paid 90 days later, 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 a three-month banker’s 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 banker’s acceptance in the discount market is 1.2% of the face amount.

How much cash will Inca Breweries receive from the sale if it holds the acceptance until maturity? Do you recommend that Inca Breweries hold the acceptance until maturity, or discount it at once in the U.S. banker’s acceptance market?

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... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...