4Q- 73 The cash manager for Thomas Industries plans to issue €2,500,000 (face value) of commercial paper for one month. She is quoted a rate of 5.88% with a dealer’s commission of 1/8% and a backup line cost of 25 basis points, both of which will be assessed on the face value. The effective cost of the financing is closest to: A. 5.91%. B. 6.03%. C. 6.16%. D. 6.29%. my guess effective cost=[2.5*0.125%+2.5*0.25%+(2.5*5.88%/12)]/(2.5-2.5*5.88%/12)
D?
Not really. The formula in the text is: [(Periodic interest + Dealer’s commission+Backup cost)/Net proceeds]*number of periods in the year Taking out the amount borrowed both from numerator and denominator would simply be: [(5.88%*1/12+0.125%*1/12+0.25%*1/12)/(1-5.88%/12)]*12=6.29%. D must be the answer. You could also get it as: (5.88%+0.125%+0.25%)/(1-5.88%/12)=6.29%
map1 Wrote: ------------------------------------------------------- > Not really. The formula in the text is: > > [(Periodic interest + Dealer’s commission+Backup > cost)/Net proceeds]*number of periods in the year > ------------------------------ which page? I couldn’t find it.
Check CFAI text volume 4, page 126.
do all short term borrowing are annualised using simple interest rate? S
hi annex guy, i remember seeing this on the mock exam. do you have a copy of it by any chance?
Learn the formula for cost of trade credit as well, its in the same section and is hard to figure out logically