Example: Great Expectations, Inc. will need $4 million over the next year to finance its short-term cash requirements. The company could sell $4 million of 90-day maturity commercial paper every three months at a rate of 7.75%. The dealer's fee to place the issue would be an initial annual 1/8% and will require Great Expectations to maintain a $400,000 compensating balance. Calculate the annual effective cost of this financing alternative for each quarter of the year and the total annual effective cost.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Example: Great Expectations, Inc. will need $4 million over the
next year to finance its short-term cash requirements. The
company could sell $4 million of 90-day maturity commercial
paper every three months at a rate of 7.75%. The dealer's fee to
place the issue would be an initial annual 1/8% and will require
Great Expectations to maintain a $400,000 compensating balance.
Calculate the annual effective cost of this financing alternative for
each quarter of the year and the total annual effective cost.
Transcribed Image Text:Example: Great Expectations, Inc. will need $4 million over the next year to finance its short-term cash requirements. The company could sell $4 million of 90-day maturity commercial paper every three months at a rate of 7.75%. The dealer's fee to place the issue would be an initial annual 1/8% and will require Great Expectations to maintain a $400,000 compensating balance. Calculate the annual effective cost of this financing alternative for each quarter of the year and the total annual effective cost.
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