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AICPA Exam CPA-Business Topic 3 Question 32 Discussion
Actual exam question for
AICPA's
CPA-Business exam
Question #: 32
Topic #: 3
[All CPA-Business Questions]
Topic #: 3
Corbin Inc. can issue three-month commercial paper with a face value of $1,000,000 for $980,000. Transaction costs would be $1,200. The effective annualized percentage cost of the financing, based on a 360-day year, would be:
Suggested Answer:
C
Choice 'c' is correct. The cost to issue the commercial paper is the $20,000 original issue discount ($1 million - $980,000), plus transaction costs of $1,200 for a total of $21,200. Therefore, it costs $21,200 to borrow $980,000 for 3 months. The 3-month interest cost is 2.16% ($21,200 / $980,000).
The annual interest cost is 8.65%
Choices 'a', 'b', and 'd' are incorrect, per the above calculation.
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