Question

Ralph, treasurer for Petrova Imports, recently updated his firm's short-term cash forecast and discovered that the firm will suffer a cash shortage of $15 million over the next month (i.e., a 30 day period).  Ralph just learned from one of his investment bankers that commercial paper in the 30-day maturity range is in demand and that discount rates are roughly 3.7%.  The dealer's annual fee is 0.10% and the annual commitment fee on a backup line of credit is 0.25%. What is the effective borrowing cost on the commercial paper?

Answer 1