Question

Corporate Finance – Chapter 27- Short Term Financial Planning

Q. 05: The Treadwater Bank wants to raise $1.1 million using three-month commercial paper. The net proceeds to the bank will be $1,084,600. What is the effective annual rate of this financing for Treadwater? Solution: Q. 06: The Needy Corporation borrowed $14,000 from Bank Ease. According to the terms of the loan, Needy must pay the bank $488 in interest every three months for the three-year life of the loan, with the principal to be repaid at the maturity of the loan. What effective annual rate is Needy paying? Solution: Q. 07: The Signet Corporation has issued four-month commercial paper with a $6.3 million face value. The firm netted $6,113,898 on the sale. What effective annual rate is Signet paying for these funds? Solution:

Answer 1

Answer 5)

Raised $ OR value to be reapid = 1,100,000

Net proceeds received = 1,084,600

Excess Paid at Maturity = 1,100,000 - 1,084,600 = 15,400

Interest Rate for 3 months = Excess paid / Net Proceeds

= 15,400 / 1,084,600  

= 1.4199%

Effective Rate = (1+ 0.014199 ) ^4 -1

= 1.05801716097 -1

= 5.80%

Answer 6)

Interest per quarter = 488

Principal = 14000

Interest Rate for a quarter = 488 / 14000

= 0.03485714285

Effective Interest Rate = (1+ 0.03485714285) ^4-1

= 1.14699857866 -1

= 14.69%  

Answer 7)

Raised $ OR value to be reapid = 6,300,000

Net proceeds received = 6,113,898

Excess Paid at Maturity = 6,300,000 - 6,113,898 = 186,102

Interest Rate for 3 months = Excess paid / Net Proceeds

= 186,102 / 6,113,898

= 3.043917317%

Effective Rate = (1+ 0.03043917317 ) ^3 -1

= 1.0941253525 -1

= 9.41%