Question

Freeman Corp., a large corporation, plans to issue 45-day commercial paper with a par value of $3,000,000. Freeman expects to sell the commercial paper for $2,947,000. Freeman's annualized cost of borrowing is estimated to be ____ percent.

Answer 1

Freeman Corp's annualized cost of borrowing is estimated to be 14.3 percent.

What is the annualized cost?

The annualized cost of borrowing represents the percentage cost of debt when, for example, the 45-day commercial paper is smoothened over a year or 365 days.

Data and Calculations:

Par value of 45-day commercial paper = $3,000,000

Sale proceeds from the commercial paper = $2,947,000

Discount  on issuance = $53,000 ($3,000,000 - $2,947,000)

Annualized cost of borrowing = 0.143 ($53,000/45 x 365)/$3,000,000

= 14.3% (0.143 x 100)

Thus, Freeman Corp's annualized cost of borrowing is estimated to be 14.3 percent.

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