Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(Cost of short-term bank loan) On July 1, 2018, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB)

image text in transcribed

(Cost of short-term bank loan) On July 1, 2018, the Southwest Forging Corporation arranged for a line of credit with the First National Bank (FNB) of Dallas. The terms of the agreement call for a $90,000 maximum loan with interest set at 2 percent over prime. In addition, the firm has to maintain a 17 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 10 percent. Note: Interest is not paid in advance (discounted). a. If Southwest normally maintains a $15,300 to $24,300 balance in its checking account with FNB of Dallas, what is the effective cost of credit under the line-of-credit agreement when the maximum loan amount is used for a full year? b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement. Again, assume the full amount of the loan is outstanding for a whole year. HIGH a. If Southwest normally maintains a $15,300 to $24,300 balance in its checking account with FNB of Dallas, what is the effective cost of credit, or APR, under the line-of-credit agreement when the maximum loan amount is used for a full year? % (Round to two decimal places)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

How To Analyse Bank Financial Statements

Authors: Thomas Padberg

1st Edition

0857195182, 978-0857195180

More Books

Students also viewed these Finance questions