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A company has a choice of borrowing money by issuing commercial paper or opening a...

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Finance

  1. A company has a choice of borrowing money by issuing commercial paper or opening a line of credit. You are to evaluate the effective annual rate of each option and choose which one the company should use.

    1. a) A company issues $50,000,000 of commercial paper with a 60-day maturity at a discount rate of 1.5%. The paper is sold through a dealer for an annual charge of .10%. There is also a backup line of credit that costs .25%. What is the effective annual cost of issuing the commercial paper?

    2. b) A firm has an average loan outstanding of $50,000,000 on a $75,000,000 line of credit. There is a commitment fee of 0.25% on the unused portion of the line, the interest rate on the borrowed funds is 1.55%, and there is a 5% compensating balance requirement?

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