Question: Assume that your firm has a Tshs 100 million line of credit that requires a compensating balance equal to 20% of the loan amount. The

Assume that your firm has a Tshs 100 million line of credit that requires a compensating balance equal to 20% of the loan amount. The rate paid on the loan is 12% per annum, Tshs 50 million is borrowed for a six-month period, and the firm does not currently have a deposit with the lending bank. To accommodate the cost of the compensating balances requirement, assume that the added funds will have to be borrowed and simply left idle in the firm’s current account. What would the annualized rate on this loan be with the compensating balance requirement?

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