4. An assistant treasurer is currently reevaluating their firms banking relationship. The firms current lender charges an effective borrowing cost of 4.25%. A competing lender provides the following quote for a $20,000,000 committed credit line: interest rate of 3.50% and a commitment fee of 0.25% on the unused portion of the line. After reviewing the firms account analysis statement, the assistant treasurer notes that the average daily borrowings on last years credit line were $6,500,000

a. Assuming that the firm will borrow the same amount as last year, calculate the effective cost on the competitors credit line

b. Based on your answer in a., do you recommend that the assistant treasurer make a change?

c. Suppose that the assistant treasurer is considering negotiating a lower interest rate (say to 3.25%) in exchange for a higher commitment fee (0.50%). Would you recommend that the assistant treasurer pursue this change?

d. Suppose that the assistant treasurer is considering negotiating a higher interest rate (say to 3.75%) in exchange for no commitment fee. Would you recommend that the assistant treasurer pursue this change?

e. Go back to the original assumptions used for a. Now, assume that credit market conditions have suddenly tightened and lender provides the same original quote with the addition of a 10% compensating balance. Should the assistant treasurer switch to the competing bank?