The Jubilee Manufacturing Company is going to issue 180-day commercial paper to raise $25 million.It anticipates a discounted interest rate of 13 percent,and dealer placement costs of approximately $60,000.What is the effective annual cost of credit to Jubilee?

Question

Quizplus · Accepted Answer

To calculate the effective annual cost of credit, we need to use the formula:

Effective Annual Interest Rate = [(Discount Interest / Net Proceeds) x (365 / Days)] x 100%

Discount Interest = ($25 million x 0.13 x 180/360) = $1,625,000
Placement Costs = $60,000
Net Proceeds = ($25 million - $1,625,000 - $60,000) = $23,315,000

Effective Annual Interest Rate = [(1,625,000 / 23,315,000) x (365 / 180)] x 100%
= 14.45%

Therefore, the effective annual cost of credit to Jubilee is 14.45%. The best choice is C.

The Jubilee Manufacturing Company Is Going to Issue 180-Day Commercial