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17. Commercial paper.Criss-Cross Manufacturers will issue commercial paper for a short-term cash inow. The paper is for 91 days, has a face value of $50,000,
17. Commercial paper.Criss-Cross Manufacturers will issue commercial paper for a short-term cash inow. The paper is for 91 days, has a face value of $50,000, and is anticipated to sell at 96% of par value. Criss-Cross wants to raise $3,000,000, so what is the cost of this borrowing (annual terms) and how many "papers" will be sold? Selling price is 0.96 x $50,000 = $48,000 The cost of this borrowing is: Three-Month Interest Rate = ($50,000 $48,000) / $48,000 = 0.041667 Stated annually we have: Annual Percentage Rate = 0.041667 x 4 = 16.67% Effective Annual Rate = (1 + 0.04167)4 1 = 17.738%. The total number of "papers" sold will be: Number issued = $3,000,000 / $48,000 = 63(must sell in whole units)
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