hellow bros ans sisters
i would ask about the example 7 in the book of corporate finance page 179,
firstly i understood that the all-in cost is when a firm needs $5 millions for 1 month, anf got a 6.75% interest rate, so it will get a $4,974,875 and it must return it $5 millions at the end of month, is it right?
why they not subtracted the backup costs in the denominator?
If I understand you correctly, your first question is referring to the net proceeds of the loan. Those would be:
$5,000,000-(0.0675*5,000000*1/12)=$4,971,875
Your second question seems to refer to the commercial paper, I agree that it would be intuitive to subtract the backup costs in the denominator (since it reduces the net proceeds) but the formula right above the example box says not to do so, without explaining why. I find the entire section poorly explained. If you look at the formula for the line of credit, you’ll notice that the commitment fee is also not included in the denominator (albeit reducing the net proceeds of the loan). So it appears that only the interest is considered when computing net proceeds.
I hope this helps.