Question

Mt. Olive Pickle Co. exports pickle products to the Eurozone and invoices its customers in U.S. dollars. Aldi in Germany has purchased​ $1,000,000 of pickle products from Mt.​ Olive, with payment due in 6 months. The payment will be made with a​ bankers' acceptance issued by Deutsche Bank at a fee of​ 2.65% per annum. Mt. Olive has a WACC of​ 9.0% per annum. If Mt. Olive holds this acceptance to​ maturity, what is its annualized percentage​ all-in-cost (AIC). Assume a​ 360-day year.
A.
​11.69%
B.
​11.99%
C.
​12.42%
D.
​12.89%

Answer 1

Given,
Value of Pickle Products = $1,000,000
Credit Terms = 6 months = 180 Days
Banker's Acceptance Fee = 2.65%
WACC = 9%
Banker's Acceptance Fees
= Value of Pickle Product*Banker's Acceptance Fee*180Days/360 Days
= $1,000,000*2.65%*180/360
= $13250
Amount Received
= Value of Pickle Products - Banker's Acceptance Fees
= $1,000,000 - $13250
= $986750
Opportunity Cost of Capital
= Amount Received*WACC*180Days/360Days
= $986,750*9%*180/360
= $44403.75
Annualized % All-In-Cost(AIC)
= [(Banker's Acceptance Fees+Opportunity cost of Capital)/Amount Received]*360Days/180Days
= [($13250+$44403.75)/$986750]*360/180
= [$57653.75/$986750]*360/180
= 0.1169
i.e. 11.69%
Annualized % All-In-Cost (AIC) = 11.69%