Tarentum Industries, Inc., has a revolving credit agreement with its bank under which the company can borrow up to $10 million at an interest rate of 1.5 percentage points above the prime rate (currently 9.5 percent). Tarentum is required to maintain a 10 percent compensating balance on any funds borrowed under the agreement and to pay a 0.50 percent commitment fee on the unused portion of the credit line. Assume that the company has no funds in its account at the bank that can be used to meet the compensating balance requirement.

Determine the annual financing cost of borrowing each of the following amounts under the credit agreement: LO1

a. $2 million

b. $7 million