A large ski manufacturer issues $50 million face value 60-day commercial paper for net proceeds of $49.75 million. The ski manufacturer must maintain a $50 million credit line, on which it must pay a standby fee of .1 percent. The effective annual cost to the ski manufacturer of this financing arrangement is nearest to:

Question

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The effective annual cost includes the interest cost and the standby fee. The interest cost is ($50 million - $49.75 million) / $49.75 million for 60 days, annualized. The standby fee is 0.1% of $50 million, annualized. Adding these gives an effective annual cost of approximately 3.73%.

A Large Ski Manufacturer Issues $50 Million Face Value 60-Day