Rearden Metal wants to raise $5 million using six-month commercial paper.The net proceeds to Rearden will be $4,865,000.The effective annual rate for this financing is closest to:

Question

Quizplus · Accepted Answer

The effective annual rate is closest to 5.6%. This is because the net proceeds are $4,865,000 and the face value of the commercial paper is $5,000,000. The difference between these two amounts is $135,000, which is the interest expense for the six-month period. The effective annual rate is calculated as follows:Effective annual rate = (Interest expense / Net proceeds) x (360 / Days in period)= ($135,000 / $4,865,000) x (360 / 180)= 5.6%

Rearden Metal Wants to Raise $5 Million Using Six-Month Commercial