Question: XYZ Inc. has a $ 7 5 0 , 0 0 0 operating loan with a 1 2 % compensating balance requirement. The quoted interest

XYZ Inc. has a $750,000 operating loan with a 12% compensating balance requirement. The
quoted interest rate is 8%. The firm needs to borrow $395,000 for inventory for one year.
The firm has credit sales of $600,000 and an average accounts receivable balance of $54,000.
It factors its receivables throughout the year with the local bank at a 3% discount. How much
does the firm actually need to borrow? What is the interest rate the firm is effectively paying
on the inventory loan? What is the effective annual rate that the firm gets from factoring its
account receivables?

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