(Cost

of commercial

paper)

Tri-State Enterprises plans to issue commercial paper for the first time in the firm's 35-year history. The firm plans to issue

$500,000 in 270-day maturity notes. The paper will carry a 10.50 percent rate with discounted interest and will cost Tri-State $11,000 (paid in advance) to issue.

Note:

Assume a 30-day month and 360-day year.

a. What is the effective cost of credit to Tri-State?

b. What other factors should the company consider in analyzing whether to issue the commercial paper?

"The risk involved with the issue of commercial paper should be considered. This risk relates to the fact that the commercial paper market is highly impersonal and denies even the most creditworthy borrower any flexibility in terms of when repayment is made. In addition, commercial paper is a viable source of credit to only the most creditworthy borrowers. Thus, it may simply not be available to the firm."

Is the above statement true or false?