Reference no: EM131332093
Professors Note: Your answer is close but incorrect. Please review "calculating the effective cost of short term credit" in your text. You need to make sure that the note amount is the NET amount (what Worthington actually receives after costs/int).
Please edit this essay based on the above note:
Worthington, Inc. is planning to issue $7,500,000 in 120-day maturity notes carrying a rate of 11 percent per year. Worthington's commercial paper will be placed at a cost of $35,000. What is the effective cost of credit to Worthington?
The effective cost of credit is respectively determined through the cost of acquiring funds which are used within specific investments. Within this scenario, Worthington, Inc. will be issuing $7,500,000 in 120-day maturity notes, which will carry a rate of 11% per year. What this means is that Worthington, Inc. has taken on borrowed funds and has now committed themselves to pay a designated sum which will be due after 120 days from when the sum was borrowed. Because nothing comes for free, and there is interest on everything, Worthington, Inc. had to promise an 11% rate on the borrowed funds in return for the lenders money. Unfortunately for Worthington, Inc. this means that they end up repaying much more than it had originally borrowed.
On top of the interest that will be paid out, Worthington, Inc. will also incur additional expenses because they are employing a borrowing mechanism through the giving of notes. The short term cost of the notes is $35,000, which entails the cost of the actual transaction, insurance, and applicable taxes.
Within the scenario of Worthington, Inc., the maturity period of the notes are 120 days. Assuming 360 days in a year, 120 days is 1/3 of that year (360 days /3= 120) leaving the annual interest rate for the bond at 11% payable in thirds. This would be the same as is a 3.66667% interest on the whole amount. Ultimately, the credit interest is costing $275,000 which is $7,500,000* (120/360 * 11%) + $35,000. When you add the interest cost of $275,000 to the $35,000 commercial paper cost, the effective cost of credit to Worthington, Inc. totals $310,000 ($275,000 + $35,000). The breakdown is as follows:
- Assumed days in a year = 360
- Interest to pay for 120 days = $7,500,000 * 11% * 120/360 = $275,000
- Cost of commercial paper = $35,000
- Total cost taken on for 120 period = $275,000+$35,000 = $310,000
- Assuming the year has 360 days, the answer is: $310,000/$7,500,000 = 4.1333%
- Since the rate is not expressed on an annual basis, it must be annualized: 4.1333% × 3 = 12.40%
Relative valuation of common stock
: (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: Now show that you get the same answer using the discounted dividend model. The stock price using t..
|
Describe the crime depicted in the article
: Write an analysis of each article or news story addressing the following: Describe the crime depicted in the article. How is criminal justice system portrayed
|
What rate should the firm use to discount project cash flows
: Titan Mining Corporation has 8.5 million shares of common stock outstanding, 250,000 shares of 5 percent preferred stock outstanding, and 135,000 7.5 percent semiannual bonds outstanding, par value $1,000 each. If Titan Mining is evaluating a new inv..
|
Solid grounding in the academic theories of investing
: It is essential that you have a solid grounding in the academic theories of investing. In your final assignment, compare and contrast the academic theories of investing covered in your required readings with the philosophies of three of the world'..
|
Calculating the effective cost of short term credit
: Professors Note: Your answer is close but incorrect. Please review "calculating the effective cost of short term credit" in your text. You need to make sure that the note amount is the NET amount (what Worthington actually receives after costs/i..
|
Bonds will have the greatest percentage increase in value
: Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent?
|
Analyzes the future impact of this social problem
: Complete a 5-7 page final paper that analyzes the future impact of this social problem you have mentioned in the second writing assignment, which is stereotypes in America, mainly racial sterotypes
|
The coupon rate of a bond equals
: The coupon rate of a bond equals
|
Factors will change when interest rates change
: Which of the following factors will change when interest rates change?
|