Memphis Metro, a service-based firm that provides high-performance training for competitive junior volleyball players, has a credit line with the following specifications:  Average daily borrowings of $400,000 on a $500,000 committed credit line  Annual interest expense on the credit line of $14,500,  Commitment fee of $500 

a. Calculate the effective borrowing cost for the credit line. 

b. Recalculate the effective cost of the credit line with a compensating balance requirement of 5 percent. 

c. Recalculate the effective cost of the credit line with a compensating balance requirement of 10 percent.

 d. Discuss why the effective borrowing cost increases for a, b, and c. 

2. Textbook Brokers has a committed credit line in the amount of $2,000,000. The interest rate on the credit line is 4 percent, the commitment fee is 12.5 basis points on the unused portion of the line, and

the compensating balance is 5 percent. The CFO believes the firm will require average daily borrowings of $1,200,000. 

a. To spend $1,200,000 from the line, how much must be drawn from the credit line?

 b. Suppose that Textbook Brokers borrows the amount calculated in part a. What will the annual interest expense and commitment fee be based on? 

c. Calculate the effective borrowing cost of the credit line.

 

Answer rating: 100% (QA)

a To calculate the effective borrowing cost for the credit line without a compensating balance requirement Effective borrowing cost Annual interest ex... View the full answer