The Boyles Ceramics, Inc. established a line of credit with a local bank. The ma

Question

The Boyles Ceramics, 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, Boyles had no deposit with the bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note that was due. Boyles decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance. How much must Boyles Glass borrow?

Explanation / Answer

Total borrowing:

= Amount needed to payoff note+Interest expenses

= $240,000+$1,00,000×8%

= $240,000+$80,000

= $320,000

Hence, $320,000 needed to borrow.

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