Assignment 8

DBC Company has received a confirmation letter from the First National Bank of Miami (FNBM) about a line of credit for $12,000,000 on January 2, 2020. According to the terms of this short-term loan, DBC Company will be charged the following:

A. ABC will be charged for 50 basis points interest (on an annual basis) for any unused amount of credit from the commencement of this agreement.

B. Upon usage of any funds, the interest charge will be Prime rate plus 75 basis points. Prime rate at the commencement of this loan on January 2, 2020, was 5.25%.

C. The following events took place in 2020:

1) On February 1, 2020; DBC Co., used $4,000,000 against its line of credit for its working capital purposes.

2) On May 1, 2020; DBC Co., used an additional $2,400,000 to purchase fixed assets.

3) On June 1, 2020, upon the meeting of F.O.M.C., the Fed announced its "Quantitative Easiness" policy and reduced the discount rate by 0.50 basis points. Immediately FNBM bank reflected the same reduction to its prime lending rate.

3) On September 1, 2020; DBC Co., used $ 3,200,000 against its line of credit for its working capital purposes.

Assuming no additional loan or payment to the bank had been made during 2020.

Calculate the following for DBC Company in 2020:

1. Total interest charge.

2. The equivalent amount of borrowing on a one year basis.

3. The effective interest rate.