Question

Victory Cycles (A). Victory Cycles (U.S.) exports large-engine motorcycles (greater than 700cc ) to Australia and invoices its customers in U.S. dollars. Sydney Wholesale Imports has purchased $2,990,000 of merchandise from Victory, with payment due in five months. The payment will be made with a bankers' acceptance issued by Charter Bank of Sydney at a fee of 1.79% per annum. Victory has a weighted average cost of capital of 11%. If Victory holds this acceptance to maturity, what is its annualized percentage all-in cost? (NOTE: Assume a 360 -day year.) The bankers' acceptance fee is $ (Round to the nearest cent.)

Answer 1

The annualized percentage all-in cost for Victory Cycles holding the bankers' acceptance to maturity is $4,955.24.

Step-by-step explanation:

To calculate the annualized percentage all-in cost, we need to consider the cost of the bankers' acceptance fee and the weighted average cost of capital (WACC) of Victory Cycles. First, let's calculate the cost of the bankers' acceptance fee:

1. Convert the fee from an annual rate to a 5-month rate by dividing 1.79% by 12 (since there are 12 months in a year) and then multiplying it by 5. This gives us a fee of approximately 0.1492% for 5 months.
2. Calculate the amount of the fee by multiplying the fee rate by the purchase amount: 0.1492% of $2,990,000 is approximately $4,464.18. So, the bankers' acceptance fee is $4,464.18.

Next, let's calculate the annualized percentage all-in cost:

1. Calculate the interest expense on the bankers' acceptance fee by multiplying the fee by the WACC: $4,464.18 x 11% = approximately $491.06.
2. Add the interest expense to the fee: $4,464.18 + $491.06 = approximately $4,955.24. So, the annualized percentage all-in cost is $4,955.24.