Homework Clinic
Social Science Clinic => Business => Finance => Topic started by: saliriagwu on May 1, 2019
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AAC, Inc. is planning to issue $5,000,000 in 180-day maturity notes paying a rate of 12 percent per annum. The company expects to incur costs of approximately $20,000 in dealer placement fees and other expenses of issuing the commercial paper. The company plans to back up their commercial paper offering with a line of credit from a bank for $5,000,000. The compensating balance requirement is 10 percent of the line of credit. The company normally maintains $450,000 in its accounts with the bank. What is the effective cost of the commercial paper offering?
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Additional funds tied up with compensating balance requirements equal:
(.10)($5,000,000) - $450,000 = $50,000
Interest on commercial paper = (.12) ($5,000,000) 
= $300,000
Effect rate = 
× 
= 
× 2 = .1296