CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Kaveri Industries issues 90-day commercial paper of face value ₹100 lakh at a discount, so that the issue price is ₹97.50 lakh. Ignoring issue expenses and using a 365-day year, what is the effective annualised cost (simple, not compounded) of this financing?
The effective cost is about 10.40% per annum. The issuer receives only ₹97.50 lakh but repays ₹100 lakh, so the 90-day cost is 2.50/97.50 = 2.564%. Annualising by 365/90 gives 10.40%. Using face value as the base would understate the cost.
- A10.00%
- B10.14%
- C10.40%Correct
- D2.56%
Explanation
Discount = ₹2.50 lakh on funds actually received of ₹97.50 lakh. Cost for 90 days = 2.50/97.50 = 2.5641%. Annualised = 2.5641% × 365/90 = 10.40%. The 10.14% option wrongly uses face value as the base, and 10.00% ignores the day count and simply multiplies 2.5% by 4.
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