Final answer:
The annual financing cost (AFC) of the commercial paper issued by Eastern Pennsylvania Analytics (EPA) is 5.45%, taking into account the interest rate, placement fee, and tenure of the paper.
Step-by-step explanation:
To calculate the annual financing cost (AFC) of the commercial paper for Eastern Pennsylvania Analytics (EPA), we need to consider the amount issued, the annual interest rate, the tenure of the paper, and the placement fee.
The formula for AFC is given by:
AFC = (Interest + Placement Fee)/Net Proceeds From Paper * (365/Days to Maturity) * 100
First, let's calculate the total interest EPA will pay over the 162-day period.
Interest = Principal amount * (Annual Interest Rate) * (Days to Maturity/365)
Interest = $6,000,000 * 5.0% * (162/365)
Interest = $133,425
Next, we add the placement fee to the interest to get the total cost.
Total Cost = Interest + Placement Fee
Total Cost = $133,425 + $54,000
Total Cost = $187,425
The net proceeds from the paper are the principal amount minus the placement fee.
Net Proceeds = Principal amount - Placement Fee
Net Proceeds = $6,000,000 - $54,000
Net Proceeds = $5,946,000
Now we can calculate the AFC.
AFC = ($187,425 / $5,946,000) * (365/162) * 100
AFC = 5.45%
The annual financing cost of the commercial paper for EPA is therefore 5.45%.