Estimate the effective cost of the commercial paper

Reference no: EM13304800

Sara, treasurer for SAFECO Instruments, Inc., updated her firm's short-term cash forecast only to discover that the firm will suffer a cash shortage of $9 million for a period of two months or 60 days. SAFECO issues commercial paper sporadically and currently has none outstanding. One alternative is to liquidate a portion of her marketable securities portfolio, but with interest rates up, this is not a good alternative. She just learned from one of her commercial paper dealers that paper in the 60-day range is in demand by investors and that the asked discount rates are comparably good at about 4.5%. The dealer's annual fee is 12 basis points, and the annual commitment fee on a back-up line of credit is 20 basis points. Estimate the effective cost of the commercial paper assuming this is the only commerical paper issue she would make during the year. Sara was also approached by a bank, wanting her company's business, offered a letter of credit back-up facility with an annual fee of 50 basis point rather than a line of credit. Sara wondered how this would affect the cost of the commercial paper issue, as the fee seemed a little high.

Reference no: EM13304800

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