The Stuart glass company established a line of credit with a local bank. The max

Question

The Stuart glass company established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is 1 million$ at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement Stuart has no deposit with the bank. Shortly after signing the agreement Stuart needed 240000 to pay off a note that was due. It borrowed the 240000 from the bank by drawing a line of credit. What is the effective annual cost of credit?

Explanation / Answer

total amount borrowed=240000/75%=320000
because 25% of borrowed amount is required as compensating balance
effective annual cost of credit=320000*8%=25600

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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