ABC, Inc. established a line of credit with a local bank. The maximum amount tha

Question

ABC, Inc. established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement, ABC had no deposit with the bank. Shortly after signing the agreement, ABC needed $240,000 to pay off a note that was due. It borrowed the $240,000 from the bank by drawing on the line of credit. What is the effective annual cost of credit?

Explanation / Answer

Amount to be taken on loan=240000+0.25*240000=300000

Interest paid on 300000 @8% but amount received is 240000

So effective annual cost of credit=(300000/240000)*8=10

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.