Commercial Paper
1. The company run by Bubbles, Ricky, and Julian is planning a $1 million issue of commercial paper to finance increased sales from easing the credit policy. The commercial paper note has a 60-day maturity and 6 percent discount yield. Calculate:
a. The dollar amount of the discount
b. The price
c. The effective annual interest rate for the issue
Comparing Costs of Alternative Short-Term Financing Sources
2. To sustain its growth in sales, Monarch Machine Tools Company needs $100,000 in additional funds next year. The following alternatives for financing the growth are available:
a. Forgoing a discount available on trade credit with terms of 1/10, n45 and, hence, increasing its accounts payable
b. Obtaining a loan from a bank at 10 percent interest paid up front
Calculate the cost of financing for each option and select the best source.