# Q

A company plans to issue €2,500,000 (face value) of commercial paper for one month. The company is quoted a rate of 5.88 percent with a dealer’s commission of 1/8 percent and a backup line cost of 1/4 percent, both of which will be assessed on the face value. The effective cost of the financing is closest to: A. 6.03%. B. 6.16%. C. 6.29%

I think this is from the working capital section. Key here is to put total interest costs on top. Get your interests into 12ths .0588(1/12) + .00125(1/12) +.0025(1/12) / 1 - (.0588 x 1/12) Multiply this whole equation by the number of periods which is 12. You should wind up with 6.285 which would be C

Do you not change the 5.88% into EA? = = 6.04%? Leaving the costs as is I calc’d this and got B

Thx, I used ur calculation and I got 6.2707…, pretty close. But dude, that’s some calculation. Any easier way to remember that formula? -------------------------------------- Another way to look at it is just calculate: .0588(1/12) + .00125(1/12) +.0025(1/12) = 0.0052 * 12 * 100 = 6.24%. Close enough. ------------------------------- My initial calculation was: .0588 + .00125 +.0025 = 6.2550%. BEY = [(1.0626^.05) - 1} * 2} * 100] = 6.16 <<<< Option B & wrong answer. ------------------------------ How are you supposed to know the right one to use?

They list dealer commission and backup line interest costs which should give you the red flag to use formula that was given for working capital financing rates which include commercial paper, revolving, etc… The way i remember it is that for these formulas they put all interest costs on top and proceeds on the bottom with the exception of calculating for commercial paper which 1 - quoted rate in the denominator. Its intuitive to multiply the period at the end to get the annualized effective yield.