XYZ Inc.is planning a $200,000 90-day commercial paper issue.The issue is sold for $193,500.There is a flotation cost of $1,500.The corporate tax rate is 35%.(Assume a 365-day year.) Which of the following statements is correct?

Question

Quizplus · Accepted Answer

The before-tax cost of the commercial paper can be calculated using the formula: [(Face Value - Net Proceeds) / Net Proceeds] * (365 / Days to Maturity). The net proceeds are $193,500 - $1,500 = $192,000. Thus, the before-tax cost is [($200,000 - $192,000) / $192,000] * (365 / 90) = 16.77%.

XYZ IncIs Planning a $200,000 90-Day Commercial Paper Issue