The Brandt Company has been approached by two different commercial paper dealers offering to sell an issue of commercial paper for the company.
Dealer A offered to market an $8 million issue maturing in 90 days at an interest cost of 8.5 percent per annum (deducted in advance). The fee of Dealer A would be $12,000. Dealer B has offered to sell a $10 million issue maturing in 120 days at an interest rate of 8.75 percent per annum (deducted in advance). The fee to Dealer B would be $15,000. REQUIRED:
Determine the annual financing cost (AFC) for dealer A and dealer B. Assuming that the Brandt wishes to minimize the annual financing cost of issuing commercial paper, which dealer should it choose?
Show workings where appropite.