Vaughn Corporation Is Considering the Issue of Commercial Paper and Would

question 27

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 default risk premium, 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)8.0
• B)7.6
• C)7.5
• D)7.9
• E)none of the above

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Definitions:

Operating Cash Flow

Operating cash flow is the cash that comes from a company's usual business activities, showing if it can produce enough positive cash flow to sustain and expand its operations.

EBIT

Earnings Before Interest and Taxes, a measure of a firm's profit that includes all income and expenses except interest and income tax expenses.

Straight-Line Depreciation

A method of allocating the cost of a fixed asset evenly across its useful life.

Net Working Capital

The discrepancy between what a company owns in current assets and owes in current liabilities, showing its financial stability in the short term.