Commercial Paper

20-6. The company run by Bubbles, Ricky, and Julian is planning a $1 million issue of commercial paper to finance increased sales from easing the credit policy. The commercial paper note has a 60-day maturity and 6 percent discount yield. Calculate:

a. The dollar amount of the discount

b. The price

c. The effective annual interest rate for the issue

Comparing Costs of Alternative Short-Term Financing Sources

20-15. To sustain its growth in sales, Monarch Machine Tools Company needs $100,000 in additional funds next year. The following alternatives for financing the growth are available:

a. Forgoing a discount available on trade credit with terms of 1/10, n45 and, hence, increasing its accounts payable

b. Obtaining a loan from a bank at 10 percent interest paid up front

Calculate the cost of financing for each option and select the best source.