Vaughn Corporation Is Considering the Issue of Commercial Paper and Would

question 60

Multiple Choice

Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper. The corporation believes that a 0.2 percent credit riskpremium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors. Furthermore, annualized T-bill rates are 7 percent. Based on this information, Vaughn should offer ____ percent on its commercial paper.

• A) 8
• B) 7.6
• C) 7.5
• D) 7.9
• E) none of the above

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Definitions:

Common Stock

A type of equity security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends.

Premium

An amount paid in addition to a standard price or rate, often for insurance or an enhanced level of service or coverage.

Interest Expense

The cost incurred by an entity for borrowed funds, recognized as a non-operating expense on the income statement.

Contractual Interest Rate

The agreed-upon rate of interest that is to be applied on the principal amount of loans, bonds, or other forms of debt as specified within a contract.