Benkart Tool and Die Company plans to sell $50,000,000 of 120-day commercial paper,on which it expects to pay discounted interest at a rate of 5% per year.Dealer fees are expected to be $30,000.The effective cost of credit to Benkart Tool and Die Company is

Question

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The effective cost of credit is the annual rate that would produce the same total interest and dealer fees as the actual cost of the commercial paper. The actual cost of the commercial paper is the discounted interest plus the dealer fees, which is $50,000,000 * 0.05 * 120/360 + $30,000 = $100,000. The effective cost of credit is the annual rate that would produce the same total interest and dealer fees, which is $100,000 / $50,000,000 * 360/120 = 5.27%.

Benkart Tool and Die Company Plans to Sell $50,000,000 of 120-Day