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annual financing cost of commercial paper financing

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Walters Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of commercial paper for the firm. The dealer indicates that Walters could sell a $5 million issue maturing in 182 days at an interest rate of 6 percent per annum (deducted in advance). The fee to the dealer for selling the issue would be $8,000.

Determine Walters' annual financing cost of this commercial paper financing.

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This provides the steps to compute the annual financing cost of commercial paper financing

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Annual financing cost = [(Interest costs + Placement fee)/( Funds used)] x (365/number of days) x 100
Interest costs = $5,000,000 x (6%) x (182/365) = $149,589
Placement fee = $8,000
Funds used = ...

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