As the newly appointed treasurer for Collingwood Corp., you have to decide how to raise $50 million in short-term financing. You believe you could issue commercial paper with a promised yield of 9 percent. However, your bank will charge a commitment fee of 0.125 percent on the line of credit to back up this paper, as well as 0.125 percent as a selling commission. As an alternative, the bank suggests using bankers’ acceptances that would have a lower yield of 8.75 percent. The bank’s “stamping” fee for these BAs is 0.325 percent. Which financing alternative should you choose?
Answer to relevant QuestionsCalculate the value of the one-month CP given the following: PAR = $500,000; r (promised yield) = 5%; probability of not defaulting = 95%; RECOVER = 0; k = 15%. Round to nearest dollar.Discuss three reasons why firms issue preferred shares.Calculate the payoff of fully exercising warrants given the following: 900,000 existing shares are outstanding (n); 100,000 warrants (m) are outstanding and are exercisable at $10 (X). The firm is valued at $10 million (V) ...What are the differences between call options and warrants?Calculate PVGO and PVEO given the following information: ROE1 = 20%; ROE2 = 25%; further investment (Inv) = $100; BVPS = $10; and Ke = 10%. Is this firm a star? If not, what is it according to Boston Consulting Group?
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