[Anonymous]

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:
a. 2.16%
b. 8.65%
c. 8.00%
d. 8.48%
Explanation
Choice “b” 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 effective periodic percentage cost is 2.16% ($21,200 / $980,000).
The effective annualized percentage cost is approximately 8.65% (2.16% × 4).
Choices “a”, “d”, and “c” are incorrect, per the above calculation.

Why does the solution use the formula of Annualized percentage cost for calculating Effective annualized percentage cost?