2. 14. Costs of borrowing [LO 18.3] A bank offers your firm a revolving credit arrangement for...
Question:
2. 14.
Costs of borrowing [LO 18.3] A bank offers your firm a revolving credit arrangement for up to $50 million at an interest rate of 1.65 per cent per quarter. The bank also requires you to maintain a compensating balance of 5 per cent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a current investment account at the bank that pays 0.75 per cent per quarter, and assume that the bank uses compound interest on its revolving credit loans.
1. What is your effective annual interest rate (an opportunity cost)
on the revolving credit arrangement if your firm does not use it during the year?
2. What is your effective annual interest rate on the lending arrangement if you borrow $30 million immediately and repay it in one year?
3. What is your effective annual interest rate if you borrow $50 million immediately and repay it in one year?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781743768051
8th Edition
Authors: Stephen A. Ross, Rowan Trayler, Charles Koh, Gerhard Hambusch, Kristoffer Glover, Randolph W. Westerfield, Bradford D. Jordan