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?
1. Face Value of commercial paper= $15 million
Issue price = Face value - (Discount rate * (Days/360) * Face Amount)
Issue price = $15 Million - 15 Million * 3.7% * 30 / 360
Issue price = 14,953,750
Interest paid = Face Value - Issue Price = 46250
Dealer fee= Annual Fee * Loan Amount * 30 / 360 = 0.1%*15000000*30/360 = $150000*30/360 = $1250
Commitment fee= Charge * Loan * 30 /360 0.25%*15,000,000*30/360= $ 3125
Total cost= 46250 + 1250 + 3125 = $50625
Effective rate= 50625 / 14,953,750 * 360/30
Effective rate= 4.06%
Ralph, treasurer for Petrova Imports, recently updated his firm's short-term cash forecast and discovered that the...
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...