Question: Firm MGST is reviewing its 1 year line of credit currently
Firm MGST is reviewing its 1-year line of credit, currently with an interest rate of 9.15%. The credit line is for $1 million, but the firm intends to use only half of it throughout the year. The commitment fee is 42 basis points. Calculate MGST’s effective borrowing rate. (EBR). MGST is considering lowering the credit line to $0.7 million. The commitment fee increases to 55 basis points, but the interest rate decreases to 9.00%. Should MGST lower the credit line based on EBR?
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