Calculating the Effective Cost of Credit

The EPG Manufacturing Company uses commercial paper regularly to support its needs for short-term financing. The firm plans to sell $100 million in 270-day-maturity paper, on which it expects to pay discounted interest at a rate of 9 percent per annum ($9 million). In addition, EPG expects to incur a cost of approximately $100,000 in dealer placement fees and other expenses of issuing the paper. What is the effective cost of credit to EPG?