Question
Help Please... I completed my Financial Mgmt(BAM 313 unit 4) written essay and the professor sent it back with comments to change it. I posted
Help Please... I completed my Financial Mgmt(BAM 313 unit 4) written essay and the professor sent it back with comments to change it. I posted it with his changes, and he's still not satisfied, and is looking for more changes, but I don't what else to write or what he's looking for. I need someone to look at the professor's original comments below (along with my original essay) AND ALSO look at my 2nd version of the essay along with my professors NEW notes. Please edit/update/tweak MY essay based on his notes in the same format that I can submit directly.
Original Question along with my initial essay:
Worthington, Inc. is planning to issue $7,500,000 in 120-day maturity notes carrying a rate of 11 percent per year. Worthington's commercial paper will be placed at a cost of $35,000. What is the effective cost of credit to Worthington?
The effective cost of credit is respectively determined through the cost of acquiring funds which are used within specific investments. Within this specific scenario, Worthington, Inc. will be issuing $7,500,000 in 120-day maturity notes, which will carry a rate of 11% per year. What this means is that Worthington, Inc. has taken on borrowed funds and has now committed themselves to pay a designated sum which will be due after 120 days from when the sum was borrowed. Because nothing comes for free, and there is interest on everything, Worthington, Inc. had to promise an 11% rate on the borrowed funds in return for the lenders money. Unfortunately for Worthington, Inc. this means that they end up repaying much more than it had originally borrowed.
On top of the interest that will be paid out, Worthington, Inc. will also incur additional expenses because they are employing a borrowing mechanism through the giving of notes. The short term cost of the notes is $35,000. What it entails is the cost of the actual transaction, insurance, and applicable taxes.
Within the scenario of Worthington, Inc., the maturity period of the notes are 120 days, which is 1/3 of a year leaving the annual interest rate for the bond at 11% payable in thirds. This would be the same as is a 3.66667% interest on the whole amount. Ultimately, the credit interest is costing $275,000 which is $7,500,000* (120/360 * 11%). When you add the interest cost of $275,000 to the $35,000, the effective cost of credit to Worthington, Inc. totals $310,000.
Professor's response to the above essay: The effective cost of short term credit needs to be expressed as an annual % rate. Please review your text-it has an excellent example. You are heading in the right direction, but are only about 1/2 the way there.
Here is my revised essay based on the professors note above:
Question #3) Worthington, Inc. is planning to issue $7,500,000 in 120-day maturity notes carrying a rate of 11 percent per year. Worthingtons commercial paper will be placed at a cost of $35,000. What is the effective cost of credit to Worthington?
The effective cost of credit is respectively determined through the cost of acquiring funds which are used within specific investments. Within this scenario, Worthington, Inc. will be issuing $7,500,000 in 120-day maturity notes, which will carry a rate of 11% per year. What this means is that Worthington, Inc. has taken on borrowed funds and has now committed themselves to pay a designated sum which will be due after 120 days from when the sum was borrowed. Because nothing comes for free, and there is interest on everything, Worthington, Inc. had to promise an 11% rate on the borrowed funds in return for the lenders money. Unfortunately for Worthington, Inc. this means that they end up repaying much more than it had originally borrowed.
On top of the interest that will be paid out, Worthington, Inc. will also incur additional expenses because they are employing a borrowing mechanism through the giving of notes. The short term cost of the notes is $35,000. What it entails is the cost of the actual transaction, insurance, and applicable taxes.
Within the scenario of Worthington, Inc., the maturity period of the notes are 120 days. Assuming 360 days in a year, 120 days is 1/3 of that year (360 days /3= 120) leaving the annual interest rate for the bond at 11% payable in thirds. This would be the same as is a 3.66667% interest on the whole amount. Ultimately, the credit interest is costing $275,000 which is $7,500,000* (120/360 * 11%). When you add the interest cost of $275,000 to the $35,000 commercial paper cost, the effective cost of credit to Worthington, Inc. totals $310,000 ($275,000 + $35,000). The effective cost of credit is to Worthington, Inc. is 12.40%, which includes all the additional costs and above mentioned factors that were involved in securing the credit. The breakdown is as follows:
Assumed days in a year = 360
Interest to pay for 120 days = $7,500,000 * 11% * 120/360 = $275,000
Cost of commercial paper = $35,000
Total cost taken on for 120 period = $275,000+$35,000 = $310,000
Interest rate for cost of credit = ($310,000/$7,500,000) * (360/120) = 12.4%
Professors 2nd response to my update: Your answer is very close but incorrect. Did the company actually receive $7.5 mil? If not, what did they actually receive (net)? Re-write and re-submit.
Please take the attached file and edit/update/tweak it to meet the criteria of the professor as I am unsure of what else to write or what I'm missing.
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