1) The Stoney River Pennant Company uses commercial paper to satisfy part of its
ID: 2665451 • Letter: 1
Question
1) The Stoney River Pennant Company uses commercial paper to satisfy part of its short-term financing requirements. Next week, it intends to sell $50 million in 180-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 19 percent per annum. In addition, Stoney River expects to incur a cost of approximately $100,000 in dealer placement fees and other expenses of issuing the paper. What is the effective annual cost of credit to Stoney River (round to the nearest .1 percent)?a. 14.0%
b. 19.0%
c. 21.5%
d.18.65%
Explanation / Answer
Calculating the Effective annual cost : The formula for calculating the effective annual cost is EAC = (1 + A / P) ^p - 1 Where A = Nominal interest rate P = Number of compounding periods (180-day is semi-annual compounding in a year) EAC = ( 1 + 0.19 / 2 )^2 - 1 = (1 + 0.095)^2 - 1 = 1.1990 - 1 = 19.9025% Therefore, the correct option is b) 19.0%Related Questions
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