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Question: (Estimating the cost of commercial paper) On February 3, 2016, the Burlington Western Company plans a commercial paper issue of $25 million. The firm has never used commercial paper before but has been assured by the firm placing the issue that it will have no difficulty raising the funds. The commercial paper will carry a 270-day maturity and require interest based on a rate of 11 percent per annum. In addition, the firm will have to pay fees totaling $150,000 to bring the issue to market and place it. What is the effective cost of the commercial paper to Burlington Western?

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