Ralph, treasurer for M & M Products, Inc., recently updated his form's short-term cash forecash 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 30-day range is in demand and that asked discount rates are comparably good at about 3.7%. The dealer's annual fee is 10 basis points and the annual commitment fee on a back-up line of credit is 25 basis points.
a. Estimate the effective cost of the commercial paper assuming that this is the only commercial paper issue planned for the year