where does it say in the question that the commercial paper is issued quarterly
an july to september is one quarter.
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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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Original Message:
Sent: 09-10-2020 02:59 AM
From: Phuc Ngo Mai Thien
Subject: Activity Measures and Financing | Subunit 2: Short-Term Financing
I send you my more particular solving work. The commercial paper is quarterly issued to meet firm's funding demand. On Sep, firm only need 10 millions and has 2 million as excess fund. Because the amount to raise fund from commercial paper is fixed at 12 millions
Original Message:
Sent: 9/9/2020 12:49:00 PM
From: Tayba Al-Mehdar
Subject: Activity Measures and Financing | Subunit 2: Short-Term Financing
how did he reach the 2M in interest in septemeber?
The treasurer is making an analysis of the short-term financing options available for the third quarter, as the company will need an average of $8 million for the month of July, $12 million for August, and $10 million for September. The following options are available:- Issue commercial paper on July 1 in an amount sufficient to net $12 million at an effective rate of 7% per year. Any temporarily excess funds will be deposited in an investment account and earn interest at an annual rate of 4%.
- Utilize a line of credit with interest accruing monthly on the amount utilized at the prime rate, which is estimated to be 8% in July and August and 8.5% in September.
Based on this information, which one of the following actions should the treasurer take?
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| Answer (C) is correct.
The cost of Option I can be calculated as follows: | Amount | | Rate | | Fraction of Year | | Totals | | | | | | | | | Interest expense for quarter | $12,000,000 | × | 7.0% | ÷ | 4 | = | $210,000 | Less: Int. earned in July | (4,000,000) | × | 4.0% | ÷ | 12 | = | (13,333) | Less: Int. earned in Sept. | (2,000,000) | × | 4.0% | ÷ | 12 | = | (6,667) | | | | | | | | | Net cost of Opt. I | | | | | | | $190,000 | | | | | | | | |
The cost of Option II can be calculated as follows: | Amount | | Rate | | Fraction of Year | | Totals | | | | | | | | | Interest expense for July | $ 8,000,000 | × | 8.0% | ÷ | 12 | = | $ 53,333 | Interest expense for August | 12,000,000 | × | 8.0% | ÷ | 12 | = | 80,000 | Interest expense for Sept. | 10,000,000 | × | 8.5% | ÷ | 12 | = | 70,833 | | | | | | | | | Net cost of Opt. II | | | | | | | $204,167 | | | | | | | | |
The better choice is the commercial paper because it costs $14,200 less than the line of credit ($204,167 – $190,000). |
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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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