commercial paper for the firm. The dealer indicates that Walters could sell a $5 million issue maturing in 182 days at an interest rate of 6% per annum (deducted in advance). The fee to the dealer for selling the issue would be $8,000. Determine Walters%26#039;s annual financing cost of this commercial paper financing.
Walters Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of?
3 trillion dollars
Walters Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of?
There isn%26#039;t quite enough information to fully answer the question, but here is my shot:
Assuming that %26quot;deducted in advance%26quot; means that the interest charges are dedected from the full amount of the loan, i.e. $5 million= interest+principle and not $5 million + interest= final amount
182 days is, as a fraction of a year, .498
.498* 6% = 2.99%, 2.99% = .0299
$5,000,000/(1+.0299)= proceeds of loan, or 4,854,756.33
$5,000,000-4,854,756.33= $145,243.67 =interest paid up front
$145,243.67 +$8,000= $153,243.67
Total cost of loan is $153,243.67
The %26quot;annual financing cost%26quot; seems to be a trick, because the loan matures in less than a year.
If one were to extend the loan out to a year, the ultimate interest paid would be higher, of course.
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