Bank Two wants to attract Michael’s Computers, Inc. to become a customer. Their sales force contacts Michael’s and offers them line of credit financing. The credit line will be for $500,000 with a one-month “clean-up” period. The APR on borrowed funds is 11 percent. Banc Two will offer the line of credit if Michael’s opens an account and maintains an average balance of $100,000 over the next 12 months. As in problem 13, ignoring compensating balances, Michael’s CFO believes its financing needs will average $280,000 monthly over the next year with a low monthly need of $50,000 and a high need forecast of $450,000.
a. Will the line of credit satisfy Michael’s needs for short-term funds?
b. How much money will Michael’s draw-down from the credit line during a low use month?
c. How much will Michael’s need to borrow in a month before it maximizes its use of the line of credit?
d. What is the average cost to Michael’s of using the credit line for a year?