• Ralph, treasurer for M and M Products, Inc., recently updated his firms short-term cash forecast only to discover that the firm will suffer a cash shortage of $15 million for a period of 30 days. One alternative is to liquidate a portion of his marketable securities portfolio but with interest rates up, this is not a good alternative. Ralph just learned from one of his commercial paper dealers that paper in the thirty-day range is in demand and that asked discount rates are comparably good at about 3.7%. The dealers annual fee is 10 basis points and the annual commitment fee on a back up line of credit is 25 basis points.
  • Estimate the effective cost of the commercial paper assuming that this is the only commercial paper issue planned for the year.
  • Estimate the effective cost of the commercial paper assuming that there will be recurring issues of commercial paper all year long.