The Large-Scale Industrial Corporation, a large well established company, is about to issue $6,000,000 worth of...
The Large-Scale Industrial Corporation, a large well established company, is about to issue $6,000,000 worth of commercial paper. The paper has a maturity of 9 months (270 days), and commands a price worth 97.5% of par value in the market. The paper will be sold with a face or par value of $100,000.
How many commercial papers will be sold?
What is the cost of this borrowing to the firm?
please answer the problem with the steps and formula....thank you
Homework Answers
Proceeds from the issue of the commercial paper = $6,000,000 * 97.5% = 5,850,000
Cost of borrowing over 270 days = ( 6,000,000 - 5,850,000) / 5,850,000* 365/ 270 = 0.0347 or 3.47%
Effective annual rate of borrowing = (1+ 3.47%) (365/270) -1 = 3.48%
No of commercial papers = 6,000,000 / 100,000= 60 papers
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