# Worthington, Inc, accounting homework help

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Essay Question:  Worthington, Inc. is planning to issue \$7,500,000 in
120-day maturity notes carrying a rate of 11 percent per year.
Worthington’s commercial paper will be placed at a cost of \$35,000. What
is the effective cost of credit to Worthington?

Assuming Simple Interest (An year has 360 days)

= \$7,500,000* 11%* (120/360) =\$275,000

= \$275,000 + \$35,000

\$310,000 (33% and 24% was incorrect interest rate for 120 days)

So
the effective cost of credit to Worthington based off the financial
principals is 11% annual interest rate paid back in120 days has
an effective interest rate of 24%.Therefore, this is the effective cost
of credit since it entails all the additional costs involved insecuring
the credit.

My professor is asking what is the interest rate for the 120 days?  Here are some of her notes to me.

1. If
you pay 10% interest and you only have use of the money for 3 months,
the effective interest rate is 40%.  Interest is stated as an annual