A company has a choice of borrowing money by issuing commercial paper or opening a line of credit. You are to evaluate the effective annual rate of each option and choose which one the company should use. a) A company issues $50,000,000 of commercial paper with a 60-day maturity at a
A company has a choice of borrowing money by issuing commercial paper or opening a line of credit. You are to evaluate the effective annual rate of each option and choose which one the company should use. a) A company issues $50,000,000 of commercial paper with a 60-day maturity at a
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A company has a choice of borrowing money
by issuing commercial paper or opening a line
of credit. You are to evaluate the effective
annual rate of each option and choose which
one the company should use.
a) A company issues $50,000,000 of
commercial paper with a 60-day maturity at a
discount rate of 1.5%. The paper is sold
through a dealer for an annual charge of
.10%. There is also a backup line of credit that
costs .25%. What is the effective annual cost
of issuing the commercial paper?
b) A firm has an average loan outstanding of
$50,000,000 on a $75,000,000 line of credit.
There is a commitment fee of 0.25% on the
unused portion of the line, the interest rate on
the borrowed funds is 1.55%, and there is a
5% compensating balance requirement?
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