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Use the following information to answer the next two questions. Smith Co. needs $300,000 for the next 180 days to meet short-term obligations. The company

Use the following information to answer the next two questions.

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

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%

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