Smith Co. needs $300,000 for the next 180 days to meet short-term obligations. The company has a line of credit with a bank that allows the company to borrow funds with an 8% annual interest rate subject to a compensating balance requirement of 25% of the loan. Smith Co. has no funds on deposit with the bank and will need the loan to cover the compensating balance. The bank also charges a 10 basis point upfront fee on the committed amount.

How much will Smith Co. need to borrow to meet its short-term obligations?

		311,835.62
		375,000
		411,835.62
		400,000

10 points

QUESTION 5

Assuming that Smith Inc. uses 100% of its line of credit (i.e. their loan is just enough to cover its short-term obligations and compensating balance). What is the effective annual rate of the loan?

		8%
		10.8%
		5.33%
		10.8%

10 points

QUESTION 6

Tropical Inc. plans to sell $60,000,000 of 120-day commercial paper, on which it expects to pay discounted interest at a rate of 5% per year. Annual dealer and back up fees are 15 and 20 basis points, respectively. The effective cost of commercial paper is

		5.52%
		1.81%
		5.63%
		7.21%