Question

Tupelo Juniors Corporation is facing a cash crunch and needs to issue $7,500,000 in commercial paper with a maturity of 45 days at a discount rate of 1%. The dealer fees on the issuance equal 0.15%. The firm will open a new committed credit line to back up the commercial paper. The commitment fee equals 0.50% on the unused line in the amount of $7,500,000. a. Calculate the amount of funds raised through the issuance. b. Calculate the dealer fee. C. Calculate the commitment fee. d. Calculate the effective cost.

Answer 1

Please refer to below spreadsheet for calculation and answer.

E F G A) Issue Price -less: Dicount Rate 3 7,500,000.00 75,000.00 7,425,000.00 -less: Dealer fees on issuance @ .15% on 7,500,000 6 11,250.00 7,413,750.00 7 8 -less: commitment fees @ .50% on 7,413,750.00 9 37,068.75 7,376,681.25 10 11 12 AMOUNT OF FUND RAISED THROUGH THE ISSUANCE OF COMMERCIAL PAPER = 7,376,681.25 13 14

15 B) DEALER FEE AS CALCULATED ABOVE IS = 11250 16 17 18 COMMITMENT FEE AS CALCULATED ABOVE IS = 37068.75 19 20 D) EFFECTIVE COST: = COST * 365 *100 AMOUNT RAISED * 45 24 25 26 = 123318.75 *365*100 7376681.25 * 45 27. 28 29 = 13.56 % = 4,501,134,375 331950656.3 30 31 Sheet1 Sheet2 Sheet3 Ready

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