FM27 15 - The use of 30-day commercial paper is the...

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Answers and Solutions: 27 - 15 b. Effective cost = (1 + 2/98) 360/30 - 1 = 0.2743 = 27.43%. Total cost = 0.2743($2,000,000)/12 = $45,717. 3. 30-day commercial paper: Interest = (0.095)($2,000,000)(1/12) = $15,833 Transaction fee = (0.005)($2,000,000) = 10,000 $25,833 4. 60-day commercial paper: Interest = (0.09)($2,000,000)(2/12) = $30,000 Transaction fee = (0.005)($2,000,000) = 10,000 $40,000 Marketable securities interest received = (0.094)($2,000,000)(1/12) = -15,667 Transactions cost, marketable securities = (0.004)($2,000,000) = +8,000 $32,333 The 30-day commercial paper has the lowest cost. b. The lowest cost of financing is not necessarily the best.
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Unformatted text preview: The use of 30-day commercial paper is the cheapest; however, sometimes the commercial paper market is tight and funds are not available. This market also is impersonal. A banking arrangement may provide financial counseling and a long-run relationship in which the bank performs almost as a "partner and counselor" to the firm. Note also that while the use of 60-day commercial paper is more expensive than the use of 30-day paper, it provides more flexibility in the event the money is needed for more than 30 days. However, the line of credit provides even more flexibility than the 60-day commercial paper and at a lower cost....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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