Cost of issuing the commercial paper. Carmelo, Inc, will need P4 million over the next year to finance its short-term requirements The company is considering financing alternatives - bank financing and the sale of commercial paper Tarlac Union Bank is willing to loan Carmelo the necessary funds providing company maintains a 20% compensating balance. The effective cost of the bank loan, considering the compensating balance requirement , 10.4 percent on a . Under the other alternative Camelo would sell P4 million of 90-day maturity commercial paper every 3 months . The commercial paper will carry a rate of 7.75 %. The interest rate is expected to remain at this level throughout the year . The commercial paper dealer's fee to place the issue would be a one -time charge of 1/8% . The commercial paper dealer will require Carmelo to establish a P400,000 compensating balance Management prefers the flexibility of bank financing However if the cost of bank financing should exceed the cost of the commercial paper by more than percent , Carmelo plans to issue the commercial paperi